Amortization and

Sinking Funds
Definition of Terms
• Amortization
A means of repaying a debt by a series of
equal payments at equal time interval.
• Principal (interest-bearing debt)
The periodic payments form an annuity in
which the present value.
Formula:
Where:
A = principal
R = periodic payment
i = interest per period
n = total number of
payment periods
 Example:
oAn obligation of ₱21, 000 with of 8% compounded
semi-annually must be paid at the end of every 6
months for 4 years.
Find the size of periodic payment.
Find the remaining liability just after the 5th
payment.
Prepare amortization table.

A = ₱21, 000 m=2 i = 0.04

r = 8% t=4 n=8
 Solution:
a. b.
 Amortization Schedule
Period Balance Payment Interest Paid = Payment for Principal =
payment – interest paid

1 P21,000.00 P3,119.08
2 P3,119.08
3 P3,119.08
4 P3,119.08
5 P3,119.08
6 P3,119.08
7 P3,119.08
8 P3,119.08
Total
 Amortization Schedule
Period Balance Payment Interest Paid = Payment for Principal =
payment – interest paid

1 P21,000.00 P3,119.08 P840.00 P2,279.08

2 18,720.92 P3,119.08 748.84 2370.24
3 16350.68 P3,119.08 654.03 2465.05
4 13885.63 P3,119.08 555.43 2563.65
5 11321.98 P3,119.08 452.88 2666.20
6 8655.78 P3,119.08 346.23 2772.85
7 5882.93 P3,119.08 235.72 2883.76
8 2999.16 P3,119.08 119.97 2999.11
Total P24,952.64 P3,953.10 P21000
 Example:
oAtsumi borrows a certain amount to buy a bicycle at
12% compounded monthly. The debt will be discharged
by paying ₱ 400 monthly for 1 year.
What is the cash value of the bicycle?
How much of her 7th payment is interest and how
much goes to repayment of the principal?
Construct the amortization table.

R = ₱400 m = 12 i = 0.01
r = 12% t=1 n = 12
 Solution:
a.)

b)
 Amortization Schedule
Period Balance Payment Interest Paid = Payment for Principal =
payment – interest paid
1 P4502.03 P400
2 P400
3 P400
4 P400
5 P400
6 P400
7 P400
8 P400
9 P400
10 P400
11 P400
12 P400
Total P4800
 Amortization Schedule
Period Balance Payment Interest Paid = Payment for Principal =
payment – interest paid
1 P4502.03 P400 P45.02 P354.98
2 4147.05 P400 41.47 358.53
3 3788.52 P400 37.89 362.11
4 3426.41 P400 34.26 365.74
5 3060.67 P400 30.61 369.39
6 2691.28 P400 26.91 373.09
7 2318.19 P400 23.18 376.82
8 1941.37 P400 19.41 380.59
9 1560.78 P400 15.61 384.39
10 1176.39 P400 11.76 388.24
11 788.15 P400 7.88 392.12
12 396.03 P400 3.96 396.04
Total P4800 P297.96 P4502.03
Sinking Funds
Sinking Fund
Refers to a fund created by making periodic deposits to anticipate the need of
paying a large amount.

Amount of Fund at Any Time

Is the sum of an ordinary annuity accumulated by equal periodic payments at
equal intervals time and the amount of interest earned.

Sinking Fund Schedule

Illustrates how the fund accumulates every payment period and to determine
the amount in the fund at any given time.
 Example:
A fund is created by making equal monthly deposits of
₱3,000 at 9% converted monthly.
Determine the sum after half year.
What is the amount in the fund after the 4th deposit?
Construct the sinking fund schedule for a 6-month
period.

R = ₱3,000 m = 12 r = 9%
Solution
a)

b) n = 4
 Sinking Fund Schedule
No. of Periodic Deposit Interest in Fund= Increase in Fund Amount in Fund
Payment = PD + IF = 1AM + IF
1 P3,000 0 P3000 P3000

2 P3,000

3 P3,000
4 P3,000

5 P3,000

6 P3,000
 Sinking Fund Schedule
No. of Periodic Deposit Interest in Fund= Increase in Fund Amount in Fund
Payment = PD + IF = PAM + IF
1 P3,000 0 P3000 P3000

2 P3,000 22.50 3022.50 6022.50

3 P3,000 45.17 3045.17 9067.67

4 P3,000 68.01 3068.01 12135.68

5 P3,000 91.02 3091.02 15226.70

6 P3,000 114.20 3114.20 18340.90

 Example:
Three years from now, Mr. T needs P30, 000 to
liquidate a certain debt, at 6% converted semi-annually.
How much must he deposit at the end of every 6
months to provide for the payment of the debt?
Prepare a sinking fund table showing the growth of
the fund for 3 years.

= ₱30,000 m=2 r = 6%
Solution
 Sinking Fund Schedule
No. of Periodic Interest in Increase in Amount in
Payment Deposit Fund Fund Fund
1 P4637.93 0 P4637.93 P4637.93

2 P4637.93 139.14 4777.07 9415

₱
3 P4637.93 282.45 4920.38 14335.38

4 P4637.93 430.06 5067.99 19403.37

5 P4637.93 582.10 5220.03 24623.40

6 P4637.93 738.70 5376.63 30000.01

Sinking Fund Method of Retiring
a Debt
A typical loan of moderate size
to an individual or a corporation
is discharge by the amortization
method.
 Example:
The principal of loan P40, 000 will be paid at the end of 1.5
years by the accumulation of a sinking fund by quarterly
deposits, and interest will be payable on the debt quarterly
at the rate of 9%.
Find the quarterly expense of the loan to the debtor if his
sinking fund is invested at 8% compounded quarterly.
Find the book value of the debt just after the 4th deposit.
Find the quarterly expense of the debt of the discharges all
liability as to principal and interest by paying his creditor
equal sums at the end of each 3 months in 2 years.
 Solution
Given:

n=6

R = P6, 341.03

The interest payable quarterly to the creditor is P40, 000(0.0225) =

P900. Therefore, the quarterly expense of the debt is P6,341.03 +
P900 = P7241.03
 Solution
Just after the 4th deposit, the fund contains

The book value of the debt is P40,000 – P26,233.07 =

P13,766.93
Solution
Stocks
&
Bonds
 Basic Terms
• Stocks – a certain company raises money by
means of selling shares ownership.
• Stockholders – the buyers of the stock
• Bond – a promise from company to pay the face
value to the bond owner
• Par value (face value) – is the original amount of
money borrowed by a company.
 Basic Terms
• Dividends – distributions of a company’s profits to
its shareholders
• Shareholders – person who owns shares of stocks
in a corporation.
• Preferred stock – is a class of corporate stock in
which the investor has preferential rights over the
common shareholders to dividends and
company’s assets.
 Basic Terms
• Common stocks – is a class of corporate in which
the investor has voting rights and shares directly
in the success or failure of the business.
• Cumulative preferred stock – is a type of preferred
stock that receives a dividend each year.
• Dividend in arrears – is the amount of dividends
that accumulate and are owed to cumulative
preferred shareholders
Formulas:
 Example:
• The AUS Enterprises has 1,500,000 shares of common
stock outstanding. If divided of ₱30,000,000 was
declared by the company directors last year, what are
the dividends per share of common stock?
• Solution:
 Example:
• Sirug Corporation has 70,000 shares of
₱2,000 par value, 5% cumulative preferred
stock and 250,000 shares of common stock.
Although no dividend was declared last year,
a ₱25,000,000 dividend was declared this
year. Determine the amount if dividends due
the preferred shareholders and dividend per
share of common stock.
 Solution:
DPS(preferred) = 2000 * 0.05 = ₱100
TPD (per year) = 70000(100) = ₱7,000,000
TPD = 7,000,000 + 7,000,000 = ₱14,000,000
TCD = 25,000,000 – 14,000,000 = ₱11,000,000
 Current Yield of Stocks
Current yield – is a way of determining the current value
of a stock

Formula:
 Example:
If RFS Corporation paid a dividend of ₱142.60 per share
last year. If yesterday’s last price was ₱2,300, what is the
current yield on the stock?

Solution:
 Example:
Calculate the current yield for SJS Corporation stock,
which pays a dividend of ₱70 per year and is currently
selling at ₱1,400 per share.

Solution:
 Price-Earnings Ratio of a Stock

Formula:
 Example:
WSS Inc. is currently selling for ₱2,685 per share. If the
company had earnings per share of ₱89.50 in the past
year, what is the price-earnings ratio for WSS?
Solution:
 Cost, Proceeds, Gain(Loss) of a Stock
Transaction
Proceeds – are the amount of money that an
investor receives after selling a stock.
Stockbroker’s commission – is the free
charges for assisting in the purchase or sale
of shares of stock
Stockbroker – is a professional in stock
market trading and investment
 Cost, Proceeds, Gain(Loss) of a Stock
Transaction
Gain (or loss) – is the difference between
the cost purchasing the stock and the
proceeds received when selling the stock.
Round lot – multiple of 100 shares
Odd lot – less that 100 shares.
Formulas (cost of purchasing
stock)
Formulas (proceeds from selling stock)

Formulas (gain or loss of transaction)

 Example:
You purchase 250 shares of AUS Inc. common stock
of ₱3,500 per share. A few months later, you sell the
shares at ₱4,000. Your stockbroker charges 3%
commission on round lots and 4% on odd lots.
Calculate the,
a. Total cost
b. Proceeds
c. Gain (or loss) on the transaction
 A. Cost of purchasing stock
Given: PS = ₱3500
NS = 250
CR (Round lots) = 3% or 0.03
CR (Odd lots) = 4% or 0.04
 B. Proceeds from selling stocks
Given: PS = ₱4000
NS = 250
CR (Round lots) = 3% or 0.03
CR (Odd lots) = 4% or 0.04
C. Gain (or loss) in the transaction

So, the transaction’s gain is ₱65,000

 Current Yield of a Bond

Formula:
 Example:
What is the current yield of a bond whose face value is
₱14,500 and pays a yearly interest of 12% if purchased at
face value and ₱13,920?
Solution:
A. When the price of bond is ₱14,500

B. When the price of bond is ₱13,920

 Computing the Price of a Bond based
on General Method
V = Redemption value of a
bond
F = face value or par value
of the bond
P = Price of a bond
r = bond rate
k = coupon payment
j = nominal interest rate
m = number of conversion
per year
t = time period (term) of
loan or investment
b = periodic bond interest
rate
i = periodic interest rate
The regular (periodic) interest payment from the bond will be:

The price of a bond is computed using the formula,

 Example:
A ₱3,200, at 9% bond pays coupons quarterly and will be
redeemed on July 7, 2014. Find the price if the bond was
bought on July 7, 2010 to yield 8% compounded
quarterly if the bond is redeemable at par, and if the
bond is redeemable at 110%.
Given:
V = ₱3200 t = 4 j = 8% or 0.08
m=4 n = 16 r = 9% r 0.09
A. The redemption value is ₱72
B. At 110% redemption means
 Computing the Price of a Bond based
on Premium Method
If a bond is sold for more than its par value or the
bond interest is higher that the current market
rate.
Formula:
 Example:
At ₱8,000, at 9% bond with bimonthly coupons will
be redeemed at the end of 5 years. Determine the
price to yield 6%.
Given:
F = ₱8000 t=5 j = 6% or 0.06
M=6 n = 30 r = 9% r 0.09
 Solution
The redemption value is
k= Fb
k = (8000)(0.015) = ₱120
 Computing the Price of a Bond based
on Discount Method
If a bond is sold for less than its par value or the
bond may not be as high as the current market
rate.
Formula:
 Example:
At ₱7,000, at 10% bond with quarterly coupons
will be redeemed at the end of 3 years. Determine
the price to yield 12%.
Given:
F = ₱7000 t=3 j = 12% or 0.12
m=4 n = 12 r = 10% r 0.10
 Solution
The redemption value is
k= Fb
k = (7000)(0.025) = ₱175
DEPRECIATION
 Types of Depreciation
• Normal Depreciation
Physical depreciation – is due to the lessening of
the ability of a property to produce result.
Functional depreciation – is due to the lessening
in the demand for function.
• Depreciation due to changes in price levels
• Depletion – refers to the decrease in the value
of a property due to the gradual extraction of its
content. (W = P – L)
 Types of Depreciation
•Accrued Depreciation (E)
the sum of depreciation in its lifetime.
the sum of depreciation at any time.
•Depreciation charges – a reduction in the
listed value of the machine.
B=P–E
 A. Straight-line Method
• Let us denote
P – original cost
L – scrap value/resale/salvage value
n – number of year/s (estimated life)
D – annual depreciation

E – accrued value
B – book value
 Formulas
or

E = tD

B=P–E or B = P – tD
 Formulas (for total depreciation)

Where:
- total depreciation of the property over a period of
time.
n – number of years (estimated)
d – annual depreciation
 Formulas (for book value)

Where:
B – book value
P – original cost
D – annual depreciation
N – number of year
 Example:
A machine costing 10,000 is expected to have a
salvage value of 500 after 5 years. Construct a
schedule of depreciation using the straight-line
method.
Given: Unknown:
P = 10,000 W=?
L = 500 d=?
n = 5 years
 Solution
Given: Unknown:
P = 10,000 W=?
L = 500 d=?
n = 5 years

W=P–L
W = 10000 – 500
W = 9,500
Depreciation Schedule
Year Yearly Accrued Value Book Value
(n) Depreciation (B)

0 0 0 10,000
1 1,900
2 1,900
3 1,900
4 1,900
5 1,900
Depreciation Schedule
Year Yearly Accrued Value Book Value
(n) Depreciation (B)

0 0 0 10,000
1 1,900 1,900 8,100
2 1,900 3,800 6,200
3 1,900 5,700 4,300
4 1,900 7,600 2,400
5 1,900 9,500 500
 Example:
A motorcycle cost is 80,000. its depreciation value is
5,000 annually. Find:
a. total depreciation at the end of 8 years.
b. the book value at the end of 2 years.

Given:
Unknown:
P = 0,000
=?
D = 5,000
B=?
n = 5 years
 Solution:
Given: Unknown:
P = 0,000 =?
D = 5,000 B=?

b. B = 80000 – 2(5000)
B = 80000 – 10000
B = 0,000
 B. Sum of the Year’s Method
• Let

Where:
K = sum of the years digit
Or
K = 1+2+3+4+5…
 Example:
An equipment costing 4,500 will have a salvage value of
3,000 when retired at the end of 5 years. Solve the total
amount of depreciation every year.
Solution:
Solution:
 Perpetuity
•More likely considered a form of annuity.
Formula:
 Example:
If money is worth 6% compounded quarterly,
find the present value of a perpetuity of 100
payable quarterly.
 Example:
If money is worth 5% compounded annually, find
the present value of a perpetuity if 00 is payable at
the beginning of the year.