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2.2 Amortization
• Amortization – a debt-repayment scheme
wherein the original amount borrowed is
repaid by making equal payments periodically
• In amortization problems, we usually want to
find the following values:
– Periodic payment
– Outstanding principal at the end of any period
– Interest payment for any period
– Principal repayment for any period
– Final irregular payment, if there is any
2.2 Amortization
• Outstanding principal – refers to the amount
of debt still unpaid
• Amortization schedule – a table which shows
how a debt is completely repaid through
periodic payments, parts of which go to
interest payments and principal repayments
2.2 Amortization
2.2 Amortization
Formulas:
• Periodic payment
Ai
R
1 (1 i) n
• Outstanding principal
1 (1 i ) ( n k )
OBk R
i
(1 i ) k
1
OBk A(1 i ) R
k
i
2.2 Amortization
Formulas:
• Interest payment
IPk OBk 1 i
• Principal repayment
PRk R IPk
2.2 Amortization
3. Find R given A = Php2.75M, j = 8%, m = 1,
and t = 12 years.
Ai
R
1 (1 i) n
(2,750,000)(.08)
1 1.08 12
Php364,911.30
2.2 Amortization
5. Find OB115 given R = Php17,315, i = 1%, and
n = 180.
1 (1 i ) ( n k )
OBk R
i
1 1.01 (180115 )
OB115 17,315
.01
Php824,654.71
2.2 Amortization
9. Find OB42 given A = Php1.9M, R = Php21,525,
j = 10%, and m = 4.
(1 i ) k
1
OBk A(1 i ) R
k
i
1.025 42
1
OB42 1,900,000(1.025 ) 21,525
42
.025
Php3,792,014.01
2.2 Amortization
17. A loan is to be amortized via equal payments
of Php119,764.71 each at the end of six
months for 9 years. If the interest is based on
10% compounded semi-annually, find
a) the original amount of the loan
b) outstanding principal after the 8th payment
c) outstanding principal after the 8th year.
2.2 Amortization
17. A loan is to be amortized via equal payments
of Php119,764.71 each at the end of six
months for 9 years. If the interest is based on
10% compounded semi-annually, find
a) the original amount of the loan
1 (1 i ) n 1 1.0518
A R 119,764.71
i .05
Php1.4M
2.2 Amortization
17. A loan is to be amortized via equal payments
of Php119,764.71 each at the end of six
months for 9 years. If the interest is based on
10% compounded semi-annually, find
b) outstanding principal after the 8th payment
1 1.05 (188)
OB8 119,764.71
. 05
Php924,791.34
2.2 Amortization
17. A loan is to be amortized via equal payments
of Php119,764.71 each at the end of six
months for 9 years. If the interest is based on
10% compounded semi-annually, find
c) outstanding principal after the 8th year.
1 1.05 (1816 )
OB16 119,764.71
.05
Php222,691.75
2.2 Amortization
19. Goriotik obtains a Php13M bank loan at 12%
interest compounded semi-annually to
construct another studio. The company repays
the loan by paying Php0.5M every 6 months.
What is the outstanding principal after the
10th payment?
1.0610
1
OB10 13,000,000(1.06 ) 500,000
10
.06
Php16,690,622.58
2.2 Amortization
21. A Php1.75M loan is to be repaid through
annual payments of Php360,000. Construct an
amortization schedule up to the end of the
third period if effective interest rate is 9%.
2.2 Amortization
Period Regular Interest Principal Outstanding
payment payment repayment balance
2.2 Amortization
Period Regular Interest Principal Outstanding
payment payment repayment balance
0 1,750,000
1
2
3
2.2 Amortization
Period Regular Interest Principal Outstanding
payment payment repayment balance
0 1,750,000
1 360,000 157,500 202,500 1,547,500
2
3
2.2 Amortization
Period Regular Interest Principal Outstanding
payment payment repayment balance
0 1,750,000
1 360,000 157,500 202,500 1,547,500
2 360,000 139,275 220,725 1,326,775
3
2.2 Amortization
Period Regular Interest Principal Outstanding
payment payment repayment balance
0 1,750,000
1 360,000 157,500 202,500 1,547,500
2 360,000 139,275 220,725 1,326,775
3 360,000 119,409.75 240,590.25 1,086,184.75
2.2 Amortization
25. A loan of Php400,000 with interest at 8%
payable semi-annually is to be amortized
through equal semi-annual payments for 5
years.
a) Find the amount of each semi-annual
payment.
b) How much of the 6th payment goes to interest
payment? How much is allocated for
repayment of principal?
c) How much is the total interest paid?
2.2 Amortization
25. A loan of Php400,000 with interest at 8%
payable semi-annually is to be amortized
through equal semi-annual payments for 5
years.
a) Find the amount of each semi-annual
payment.
(400,000)(.04)
R
1 1.04 10
Php49,316.38
2.2 Amortization
25. A loan of Php400,000 with interest at 8%
payable semi-annually is to be amortized
through equal semi-annual payments for 5
years.
b) How much of the 6th payment goes to interest
payment? How much is allocated for
repayment of principal? IP OB i 6 5
2.2 Amortization
27. How much will be the quarterly amortization
for a Php1.34M loan with interest at 10%
converted quarterly for a term of 6 years?
How much interest will be paid on the 4th
payment? What is the outstanding principal in
5 years?
(1,340,000)(.025)
R
1 1.025 24
Php74,923.18
2.2 Amortization
27. How much will be the quarterly amortization
for a Php1.34M loan with interest at 10%
converted quarterly for a term of 6 years?
How much interest will be paid on the 4th
payment? What is the outstanding principal in
5 years?
1 1.025 ( 243) IP4 OB3i
OB3 74,923.18
. 025 Php30,314.95
Php1,212,597.85
2.2 Amortization
27. How much will be the quarterly amortization
for a Php1.34M loan with interest at 10%
converted quarterly for a term of 6 years?
How much interest will be paid on the 4th
payment? What is the outstanding principal in
5 years?
1 1.025 ( 24 20)
OB20 74,923.18
.025
Php281,859.07
2.2 Amortization
29. To restructure a loan payment supposedly
due now, a debtor agrees to Php111,500
payment at the end of each 6 months for 4
years including interest payments at 7%,
m = 2.
a) Determine the outstanding principal after the
4th payment.
b) What part of the 7th payment is interest
payment?
c) What part of the 7th payment is allotted for
principal repayment?
2.2 Amortization
29. To restructure a loan payment supposedly
due now, a debtor agrees to Php111,500
payment at the end of each 6 months for 4
years including interest payments at 7%,
m = 2.
a) Determine the outstanding principal after the
4th payment.
1 1.035 (8 4)
OB4 111,500 Php409,548.33
.035
2.2 Amortization
29. To restructure a loan payment supposedly
due now, a debtor agrees to Php111,500
payment at the end of each 6 months for 4
years including interest payments at 7%,
m = 2.
b) What part of the 7th payment is interest
payment?
1 1.035 (86)
IP7 111,500 (.035)
.035
Php7,413.56
2.2 Amortization
29. To restructure a loan payment supposedly
due now, a debtor agrees to Php111,500
payment at the end of each 6 months for 4
years including interest payments at 7%,
m = 2.
c) What part of the 7th payment is allotted for
principal repayment?
2.2 Amortization
• Final irregular payment
– When n is not an integer, a smaller final payment
is needed to completely settle a debt
– Unless specified, this final payment is made one
period after the last regular payment
• Formulas:
log1 AiR
n
log(1 i)
2.2 Amortization
1. A debt of Php450,000 will be amortized by
semi-annual payments of Php58,000 for as
long as necessary. If interest is paid at 5 ½%
compounded semi-annually, find
a) the number of full payments
b) the final or concluding payment
2.2 Amortization
1. A debt of Php450,000 will be amortized by
semi-annual payments of Php58,000 for as
long as necessary. If interest is paid at 5 ½%
compounded semi-annually, find
a) the number of full payments
n
log1 Ai
R
log 1 (450,000)(.0275)
58,000 8.85
log(1 i) log(1.0275)
2.2 Amortization
3. A Php25,000 office equipment is bought with
a downpayment of Php5,000 and monthly
installments of Php2,000. If the buyer pays
18% interest compounded monthly,
b) how much interest is paid on the 9th
installment?
IP9 OB8i
2.2 Amortization
3. A Php25,000 office equipment is bought with
a downpayment of Php5,000 and monthly
installments of Php2,000. If the buyer pays
18% interest compounded monthly,
c) how much of the principal has been reduced
by the 7th installment?
PR7 R OB6i
2.2 Amortization
3. A Php25,000 office equipment is bought with
a downpayment of Php5,000 and monthly
installments of Php2,000. If the buyer pays
18% interest compounded monthly,
d) what is the final irregular installment?
n
log 1 (20,000)(.015)
2,000 10.92
log(1.015)
2.2 Amortization