AMORTIZATION

1. CONCEPT, CHARACTERISTICS. USE. GENERAL FORMULA. ADVANTAGES AND

DISADVANTAGES

1.1. Concept:

The word amortization etymologically comes from the Latin mors, mortis, which means death.

For Reyes Alvarado, the term amortization in the financial field is used to
to designate the process by which a debt is gradually extinguished through payments or
periodic payments that can be the same or different over equal or different intervals of time.

These payments are made to settle both the principal amount as well as the interest and others.
concepts that generate a certain debt. The part of the principal not covered by the amortizations
On a given date, it is known as outstanding balance or principal outstanding on that date.

In all amortization processes, once the model or system has been selected
to use, we proceed to prepare the amortization table also known as the payment schedule
of the debt. The table is managed by the parties involved (creditor - debtor) in the
financial operation to facilitate monitoring compliance with all agreed payments, thus
such as the preparation of cash flows for projects that are subject to financing.

For Aliaga Valdez, amortization is the financial process by which a debt or

obligation and its interests are gradually extinguished by periodic payments made or
partial services that can be initiated together with the perception of cash stock
received advance cash flows, upon maturity of each payment period (due cash flows).

From each payment, installment, or service, a part is applied to cover the interest generated by the debt, the
remaining to reduce the outstanding balance. It is inferred that if the partial payment made is so small that
it cannot even cover the interest generated by the outstanding balance, so the difference does not
cover is capitalized.

From an accounting point of view, amortization is the process that consists of decreasing the value of a
asset, charging this amount to expenses.

Amortization problems involve:

Amount of periodic payments that can be uniform or irregular.

The number of payments whose terms are usually uniform or variable.
The interest rate that can be fixed, variable or implicit.
Create amortization tables known as 'service tables of doubt or of
loan repayment.

For Jaime A. García, the amortization of an obligation or debt is defined as the

process by which it is paid along with its interest, in a series of payments and in a
determined time.

For Ramírez Molinares, et al., the amortization of a liability or debt is defined

as the process by which it is paid along with its interest, in a series of payments
and within a certain time.

To easily visualize how a debt is paid, an amortization table is created, the

What is a chart that describes the behavior of credit regarding balance and payment?
canceled, interest generated by the loan, principal payments. Sometimes the paid installment
in a loan, the first payment is dedicated to paying the interest and what remains is considered a principal payment
capital.

For Kyrsbe, an amortization system is a method by which a capital granted in

loan is repaid through a series of payments or installments. These periodic installments constitute
a rent whose current value must be equal to the granted loan, and must in turn constitute a
imposition whose final value is equivalent to the capitalization of the loan at the end of such periods.
periods.

It could be assumed that any amortization system is an annuity or income with payments.
defeated, since if the first installment were paid at the time of the loan, it would be equivalent to
consider a loan of lower value with overdue payments.

So we conclude that financial amortization is the part of the capital returned to a

a specific date, that is, when a loan or credit is requested that is intended to be paid on
rents, these are composed of interest and part of the capital, and when canceling this part of the capital in
Each of the payments is called to amortize.
Amortizing is settling the debt through periodic payments made at intervals of time.
equal, and to easily visualize how a debt is paid, a table is created.
amortization, which is a table that describes the behavior of the credit concerning
balance, payment canceled, interest generated by the loan, principal payments.

1.2. Characteristics:

The capital decreases as payments are made, until its final settlement, and
with this, also your interests, which makes the amortization of the capital goes
increasing as the periods pass.

This is characterized by the fact that systematically as payments are made, the total
The payment is gradually decreasing until the debt is settled.

To calculate it, the current value of the rents is used.

If you want to know the amortizations of the different periods, simply multiply the
first amortization for the reason: (1+i)n, where n is the number of periods remaining for
the amortization of the corresponding period.

The sum of the amortizations will be equal to the present value or initial capital of the loan.

It is said that the rate is fixed for the duration of the loan, the installments are paid on the day of their
maturity and the disbursement is a single loan.

However, in practice this does not fully occur because:

o The rates are variable

o Borrowers can pay their installments late or ahead of time.
payments.

There are two types of amortization in general:

o The system of simple debt amortization: where the owed capital is

Pay in equal parts, the installments are fixed during the agreed term.
 o Debt amortization systems structured: they are given according to the
customer's payment capacity, for example, they may have extra installments or have
grace periods.

Every amortization system has a loan V, which will be repaid in 'n' installments.
equally spaced in time, each installment consists of two parts:

ci= vi+ sI

Where:
viit is the actual amortization payment
siinterest rate

The interest rate is calculated as the interest on the amortization installments not yet paid.
paid: si= r · (vi+ · · · + vThis means that in each installment the debtor pays a part
of the borrowed capital, I saw, and the interest on the capital still owed.

They can be with uniform installments where the rent is the same in all periods; with
extra installments agreed upon or not agreed upon, with grace periods.

Example 1:

A loan is settled in five installments of S/. 1965.19 each, every 30 days, and with an interest rate of
The interest is 36% annually, compounded monthly. The payments to be made would be:

First we find the present value:

R= 1965.19
i = 0.36/12 <> 0.03
N=5
P=?

P= 1965.19* 1-(1.03)-5
0.03
P=9000

period Balance Interest on the Payment Amortization

insolvent outstanding balance monthly

0 9000

1 7304.81 270 1965.19 1695.19

2 5558.76 219.14 1965.19 1746.05
3 3760.33 166.76 1965.19 1798.43
4 1907.95 112.81 1965.19 1852.38
5 0 57.24 1965.19 1907.95
total 825.95 9825.95 9000

Example 2: grace period case:

A loan is acquired for the amount of $10,000,000, payable in 6 bimonthly installments at 5%.
bimonthly. Prepare the amortization table, if the first installment is paid in the 4th bimonthly period.
grace period, no interest is paid nor is there any payment towards principal.

Solution:

To help us, we built a cash flow:

10,000,000

0 1 2 3 4 5 6 7 8 9 bimesters

0 1 2 3 4 5 6

P=10,000,000
i = 0.05 bim
n=6
k=3

10 000 = R * [ 1 - (1 + 0.05) ]-6] * (1.05)-3

0.05
R= 2280 723.47

period Balance interests quota Amortization

0 10,000,000
1 10,500,000 500,000 -500,000
2 11,025,000 525,000 -525,000
3 11,576,250 551 250 -551 250
4 9,874,339.03 578 812.5 2280 723.47 1,701,910.97
5 8087 332.51 493,716.95 2280 723.47 1787 006.52
6 6210 975.67 404 366.63 2280 723.47 1876 356.84
7 4,240,800.98 310,548.78 2280 723.47 1970 174.69
8 2,172,117.56 212,040.05 2280 723.47 2068 683.42
9 0 108,605.88 2280 723.47 2,172,117.56

[Link]

Any natural or legal person can apply for a loan and the action of paying it.
loan is known as debt amortization. For example, the payment in monthly installments
when acquiring a financed home, the payments made when purchasing a car, a
appliance, bank credit, etc. By acquiring the debt we also commit to fulfill
with periodic payments over a specified time and at an interest rate. When part or
All original debt has been financed for a fixed term.

Administrators use the amortization method to make quick project evaluations.

with small investments. These small projects do not necessarily involve a group of
employees and it is not necessary to conduct a rigorous economic analysis.

One way to better visualize cash flow and debt behavior through the
time, is through the use of the amortization table, also called the repayment table
[Link] Formula:

For equal payments and with the same frequency where the Income must be greater than the interest.
generated in the first period, we have that the gradual amortization is based on the annuities,
so we have:

R= P* i____
1 - (1 + i)-n
Where:
P=principal
i= interests
n = number of periods

Example:
A loan of $4000 is requested and it will be amortized through 8 equal monthly payments.
Find the value of the monthly payment if the interest rate is 34% compounded monthly.

Solution:
P=4000
N=8
i = 0.34/12

R= 4000* 0.34/12____
-8
1 - (1 + 0.34 / 12)

R= 565.83

We prepare the amortization table:

me Balance Interest on the Monthly payment Amortization

insolvent outstanding balance
0 4000
1 3547.5 113.33 565.83 452.5
2 3082.18 100.51 565.83 465.32
3 2603.68 87.33 565.83 478.5
4 2111.62 73.77 565.83 492.06
5 1605.62 59.83 565.83 506.00
6 1085.28 45.49 565.83 520.34
7 550.2 30.75 565.83 535.08
8 -0.04* 15.59 565.83 550.24
TOTAL 526.60 4526.64 4000.04*

Explanation of the amortization table:

The outstanding balance (column 2) at the beginning of the first month (month 0) is the original debt of $4,000.00.
The interest accrued at the end of that same month (month 1) was determined using the interest formula.
simple

I = 4000 * 0.34 * 1 = 113.33

12
The monthly payment is $565.83. The amortization is the subtraction of these: $565.83 - $113.33 = $452.50.
At the end of the second month (end of the first month), the outstanding balance is $4,000 - $452.50 = $
3,547.50. and so with the other months.

[Link] and Disadvantages

Advantages:
The main advantage of debt amortization is that it would reduce interest.
that apply to that loan from the banking entity.
Simplicity
The administrators use the amortization method to quickly evaluate
projects with small investments as they do not involve a group of employees and
a rigorous economic analysis is not needed.

Disadvantages:
Ignore the time value of money.
Because the amortization method focuses on short-term profitability
a deadline, an attractive project could be sidelined if the payback period is
the only consideration.
It does not consider the cash flow of a project that could occur after recovering the
initial investment.

2. AMORTIZATION SYSTEMS:

a) Gradual Amortization:

This consists of a system of constant value installments, with interest on balances.

In this type of amortization, the payments are the same and are made at equal intervals. This
The amortization method was created in Europe and is the most widespread and most common.
application in the financial field, it is an application of the annuities already studied in
previous chapters.

b) Constant Amortization:

Unlike gradual amortization, they maintain the same value for amortization in
each period and as a consequence, the periodic payment amount is a decreasing variable,
since the interest on balances is decreasing.

c) Amortization by Increased Installments:

This system consists of periodically increasing the payment fee.

d) Declining Amortization:

This system has models for increased installments similar to those of

amortization by increasing installments. For this model, the variation factor is
negative, thus converting increases into decreases. In these systems of
decreasing amortization, the borrower pays higher installments in the early periods, which
it has some importance the economic part is of increasing monetary devaluation and
A future increase in fees due to monetary correction is anticipated.

e) Amortization with extraordinary installments:

In this system, every certain number of installments includes extraordinary payments, these
they modify the amortization conditions that would affect the value of the installments and/or term of
the debt.
3. CALCULATION OF THE AMORTIZATION VALUE

Before delving into the topic, which is the calculation of the depreciation value, the primary thing would be
talk a little about it, for the calculation of the amortization value we are referring to
exactly the rent or periodic payment that must be made to pay the interest and reduce the
debt and the formulas for due annuities are used.
Formula:
A = R[ 1 – (1 + i)^-n]
i

R= A*i
1 - (1 + i)^-n

a) Example:
You acquire your loan of $10,000 payable in 3 years with semi-annual installments.
equal to 12% compounded semi-annually. Find the semi-annual payment and construct the
amortization schedule.

Data:

A = 10,000.
N = 3 years x 2 semesters = 6 sem.
I = 12% [Link] 12% / 2 = 0.06
R=?

We apply the previously written formula:

R= A*i
1 - (1 + i)^-n
R = 600
1 - (1.06)^-6

R = 2,033.63

Debt amortization status

Period Rent Interest Amortization Balance
0 -- -- -- 10,000
1 2,033.63 600 1,433.63 8,565.47
2 2,033.63 513.98 1,569.65 7,046.76
3 2,033.63 422.80 1,610.83 5,435.73
4 2,033.63 326.15 1,707.48 3,728.45
5 2,033.63 223.71 1,809.72 1,918.53
6 2,033.64 115.11 1,918.53 0
 - The debt payment is $10,000 plus the interest of $2,201.75, which totals to
$12,201.75

b) Example 2:

A debt of $500,000 is to be amortized over 5 years with annual payments equal to 8%.
Determine the value of each installment and prepare the amortization schedule for the debt.

Data:

A = 500,000.
N = 5 years
I = 8%
R=?

We apply the aforementioned formula:

R= A*i
1 - (1 + i)^-n
R = 500,000*0.08
1 - (1.08)^-5

125,228.23

Amortization status of the debt

Period Rent Interest Amortization Balance

0 -- -- -- 500,000
1 125,228.23 40,000 85,228.23 414,771.77
2 125,228.23 33,181.74 92,056.49 322,725.28
3 125,228.23 25,818.02 99,410.21 223,315.07
4 125,228.23 17,865.21 107,363.02 115,952.05
5 125,228.21 9,276.16 115,952.05 0
626,141.13 126,141.13 500,000

4. OUTSTANDING BALANCE

Balance, accounting-wise, exists between income (the credit) and expenses (the debit). Unpaid
refers to what has not yet been paid. The outstanding balance, in short, is the amount
that has not yet been paid of the original debt. If apersonrequested a loan of 100,000
dollars and has returned $ 5,000, the outstanding balance is $ 25,000.

It is important to highlight that there are loans whose interest is estimated based on the amount.
what is currently owed and others that are based on the original debt. The calculation of the interests
the first should be done month by month, through the multiplication of theinterest rate for
the outstanding balance.

The part of the principal not covered by the amortizations on a given date is known as the balance.
unpaid or principal unpaid on that date. The unpaid balance at the beginning of the term is the original debt.
The outstanding capital at the end of the term is 0 in theory; however, due to rounding, it may vary from 0.
The outstanding principal right after a payment has been made is the present value of
all the payments that are still pending.

When requesting a loan that pays interest on outstanding balances, you will have the advantage that between
the more timely the loan payment is made, the less interest will be paid, because each
The amount of interest you will pay is recalculated.

In other words, the outstanding balance is the part of a loan that has not yet been paid.
When you take out a loan, banks typically calculate the interest.
regarding the unpaid balance. This is beneficial for the customer as the interest is not calculated with
based on the capital it received, but based on the outstanding balance, which is the result of the payments.
What have you done to your capital.

The outstanding balance can be found:

Retrospective form:

It is defined as the difference between the accumulated financial value of the debt amount and the
installments that have been paid up to the time of calculation.
…
YESNIFN-1 (1+i) - Qn
YESn IF0(1+i)n– Q1(1+i)n-1 – Q2(1+i)n-2 - … - Qn-181+i) –Qt=0

Prospective form:

The prospective method consists of determining the current value of pending installments or payments.
at the moment of the evaluation.

=
YESt Qt+1V+Qt+2V2+Qt+3V3+… +QnVn−t

Comparing the two, they are equivalent.

The outstanding balance refers to the creditor's rights over an asset given as collateral and goes
decreasing, while the acquiring rights of the debtor are increasing as
the credit granted is being paid off. In a credit purchase-sale operation, after the
the debtor has made some payments, has partially acquired the asset, while the creditor, upon
having received those payments, he is no longer the owner of all rights to the asset.

It is a recurring case when the debt was contracted for the long term. To determine these rights.
equivalence equations will be formulated with the conditions under which it was agreed
contract, from here we have the right of the creditor and the debtor:

4.1 Creditor's right

The creditor can be a natural or legal person who has provided credit or goods to another.
a person who is the debtor, who awaits the evolution within a specified timeframe. In case of non-payment
I would receive an asset as compensation.

In an amortization schedule, the outstanding balance (or the creditor's right) is easily known.
When an asset is acquired partially, then the creditor does not own all of the
rights, just as the buyer has rights over a part and the seller has rights
about the other part.
Formula:

X= A*(1+i)n- R(1+i)n-1
i

Example:
A person takes a loan of $12,000 that will be paid in 6 installments with an interest of 3%
monthly. Find the rights of the creditor:

Solution:

P=12,000
N=6
i= 0.003
R=?

R = P * i___
1 - (1 + i)
R= 12000*0.03
1-(1.03)-6
R= 2215.17

Creditor balance:

X = A * (1 + i)n - R(1+i)n-1
i

X= 12000 (1.003)1– 2215.17*(1.03)3-1

0.03
X= 6265.86

4.2 Debtor's rights

If you have an amortization schedule, these are obtained from the last column of the table, in the
line where calculations are desired. To obtain the debtor's rights, it is necessary to sum the
amortization column up to the line where rights are desired to be obtained
acquired by the debtor and balance in favor of the creditor.

The debtor or borrower is the one who receives loans under various modalities, which they must repay.
reimburse according to the contractual conditions.

Formula:

X = R(1 + i)n-1– [ A*(1+i)n–A]

i
From the previous example:

A person obtains a loan of $12,000 that will be paid in 6 installments with an interest rate of 3%
Monthly. Find the rights of the debtor at the end of the 3rd month.

Solution:
X= R(1+i)n-1 – [ A*(1+i)n–A]
i
X = 2215.17 * (1.03)3-1 - [12000(1.03)-12000
1

0.03

X= 5734.15

When making an amortization table, this would be the sum of the amortization of the three.
first months.

5. DEBT RENEGOTIATION

A renegotiation allows a person to request a financial entity to modify the

originally agreed credit conditions, and these can be given under the conditions that the
income is affected and it is expected that payments will not be able to continue.

In the payment process of a medium or long-term loan, the outstanding balance can be
renegotiate

Extend the time.

Lower the interest rate
What produces a reduction in the total interest charges or extending the term in order to
constant payments decrease. By having more time to pay the loan or at a rate
lower what translates into a less costly credit.

Example:

A house is purchased through a mortgage loan of $250,000, which establishes payments.

equal monthly payments for 10 years at an interest rate of 15% compounded monthly.
After making the monthly payment at the end of the 6th year, the interest rate is successfully renegotiated.
interest decreasing to 12% capitalizable monthly if the loan term is maintained
calculate the monthly payment.

Solution:

We find the initial monthly payment:

A= 250,000
N= 10*12 =120
i = 0.15/12 <> 0.0125
R=?

R= P*i_____
1 - (1 + i)-n

R = 250,000 * 0.0125
1-( 1.0125)-120
R= 4033.37

We find the outstanding balance after 72 payments: (6*12=72)

X = A * (1 + i)n– R(1+i)n -1
I
X = 250000 * (1.0125)72- 4033.37 (1.0125)72-1
0.0125
X= 144925.56

The outstanding balance is the present value of 72 payments (120-72 = 48)

A=144925.56
N=48
i = 0.12/12 <> 0.01
R=?

R= P*i_____
1 - (1 + i)-n

R = 1449.2556
1- (1.01)-48

R= 3816.45

Given the renegotiation for the interest rate reduction to 12% compounded monthly, this will give us
$ 3,816.45

6. AMORTIZATION FUNDS

Before addressing this topic, let's ask ourselves: What are amortization funds?
According to Carlos Aliaga Valdez, Universidad del Pacifico, 1994. A sinking fund is the amount
accumulated by an annuity formed by periodic rents that earn interest, whose
the objective is to accumulate the necessary amount to settle a debt, an obligation, or another
commitment made in the past. The amortization funds are used to redeem the
bond issuance, replacing assets, settling debts with future maturities, etc.
A sum of money that accumulates in order to obtain a certain amount is called
Amortization fund. The amortization fund is generally formed by investing amounts.
equal at the end of equal periods; this means that the value of the fund, at the end of a certain
time corresponds to the amount of an ordinary annuity. The amortization funds are
established in order to pay a debt that matures on a future date, for the purchase of equipment
new to replace the depreciated or obsolete equipment, for retirement funds, etc.
Well, the amortization funds and the amortization of debts are used in order to pay a
obligation, there is a clear difference between them: the periodic payments of an amortization
destined to settle a debt that is already owed; while the periodic payments made to a
The amortization fund has the objective of accumulating with the purpose of settling a debt.
future.
- It sounds like a very interesting topic, but let's see what its characteristics are:

a)The amount of the debt or obligation to be settled remains constant.

b)The due date is known and unchangeable.

- Let's see a small example to better understand these.

characteristics.

Example 1: The company Cursi will issue bonds for $500,000 redeemable at the end of two.
years, the same that will accrue an EAR of 4% with interest payment at the end of each
quarter. Calculate:

a) the amount deposited at the beginning of the bond issuance will allow you to cover the
payment of interest.
 b) the amount of each quarterly deposit to be made to a sinking fund that will
allow to redeem the obligation at maturity. The TEA that Cursi can receive is
of 7%.

Resolution:

- Capital needed to generate the quarterly interest payment Interest a to pay

quarterly at an annual interest rate of 4%:
I = 500,000 [1.04^(1/4) - 1] = 4,926.70

Necessary capital to pay 8 rents of 4,926.70 earning an annual effective rate of 7%:
1.07^1/4 - 1 = 0.017058525
P = 4,926.70* FAS 0.0170585258 = 31,878.24

- Amount of each quarterly deposit to accumulate the fund:

R=?
S = 500,000
i = 0.017058525
n = 8.
R = S*FAS 0.017058525; 8
R = 500,000 x 0.1177261905
R = 58,863.095

What is an amortization fund for?

A sinking fund is used exclusively to pay off the principal of a debt. If

This generates interest, so it will be necessary to provide another source different from this fund.
of amortization, which serves to cancel the interest. In the previous example, Cursi can
ensure the payment of interest on the entire obligation by depositing on the date of issuance of
the bonds, a capital of $ 31,878.24. The quarterly income of $ 58,863.10 will accumulate at
expiration of the obligation (at the end of the 8th quarter) the fund of $ 500,000, with which
the obligation will be redeemed.

Formula: To calculate the value of an amortization fund, we will use the formula of
final value of an ordinary annuity from which the amount of the deposit is solved
ordinary.

S = R[ (1 + i)^n - 1]
i
R= S*i
(1 + i)^n - 1

Let's go with a small practical example:

 1. A company incurs a debt of $500,000 to be settled within 4 years. The board
the company directory decides to make equal annual reservations with the aim of
cancel the debt on its due date. If the money can be invested to earn the
8%. Find the sum that needs to be accumulated each year and prepare the table that shows
the growth of the fund.

Solution:

Data:

S = 500,000.
N = 4 years.
I = 8%.
R=?

We apply the previously mentioned formula:

R= S*i
(1 + i)^n - 1

R= 500,000*0.08
(1 + 0.08)^4 - 1

R = 110,960.40

Response: The annual contribution must be 110,960.40.

Difference between amortization and amortization fund

Although amortization funds and debt amortization are used to pay off a
obligation, there is a clear difference between them:

a) Periodic payments of an amortization are intended to settle a debt that is already

it has; while periodic payments made to a sinking fund aim to
the goal is accumulation in order to settle a future debt.

b) The key difference between the sinking fund and amortization is that, while the
Amortization fund is an investment that reserves funds to meet a need.
of future investment, amortization is periodic payments of a debt instrument
like a loan or a mortgage. Amortization is also the term used for the
accounting treatment of the amortization of intangible assets.

c) The difference between the sinking fund and amortization can be described with the
purpose of establishing any of the options and the behavior of payments
interest receipts. If the funds accumulate over time before purchasing an asset,
this is an amortization fund. Amortization occurs when the debt is obtained
currently to be settled in the future. Amortization funds help to forecast
an amount of funds that will be received on a future date; therefore, it is a form
effective in allocating funds. Since the amortization of intangible assets is a payment
not cash, it is tax deductible.

- Now let's talk a little about its importance, and from there comes the particular question: Why
Do I need a sinking fund?
 There are many reasons that make the creation of an amortization fund a
good idea. Not only is it one of the best ways to keep him out of debt, but
that also protects your emergency fund. If you have an upcoming planned event,
like a vacation, a home renovation project, a preschool enrollment or
property taxes, a sinking fund can help you save.

Even if you don't know exactly how much the expense will cost, start saving now.
will help cover at least part of the cost instead of leaving your bank account drained.
With a sinking fund, you can do several things that will keep your finances stable.
healthy.

7. CALCULATION OF THE AMORTIZATION FUND VALUE

Well, a couple of paragraphs ago we discussed what amortization is and also
What is it and how will the amortization fund be particularly useful to us.
The calculation of the amortization fund value can be seen in this formula that we have already
seen in previous paragraphs, but we will detail it below.

R= S*i
(1 + i)^n - 1

8. CALCULATION OF THE ACCUMULATED AMOUNT IN THE AMORTIZATION FUND (OUTSTANDING BALANCE)

According to Carlos Aliaga Valdez, Pacific University, 1994, to calculate the accumulated amount in
the Amortization Fund, at the end of each period, adds the deposit of the period and the interest that
generate the accumulated amount in the fund, a sum that increases the fund during the period and so on
Subsequently. The Outstanding Balance is the Difference between the total to be accumulated or debt and the Accumulated
in the Fund.

Outstanding balance = Debt – Amount accumulated in the fund

Now let's see it algebraically:

X = DEBT - R[(1 + i)^n - 1]

i

To understand a little more, let's do a brief example, where we will see its application.
Example:
A debt of $300,000 matures in 6 years. To settle it, a fund is established.
Amortization that earns 8% effective interest. Calculate the outstanding balance at the end of the fourth year.
Data:
S = 300,000.
N = 6 years.
I = 8%.
X = Outstanding balance ??
First, we will calculate the income in order to apply the previously mentioned formula.

R= S*i
 (1 + i)^n – 1

R= 300,000*0.08
(1.08)^6 – 1

R = 40,894.62

After that, we will replace the R in our formula:

X = DEBT - R[(1 + i)^n - 1]
i
X = 300,000 - (40,894.62)[(1.08)^4 - 1]
0.08

X = 115,724.26

Outstanding balance is 300,000 - 115,724.26 = $184,275.74

9. NUMBER OF DEPOSITS AND SAVINGS FUND

In some cases, the sum that can be periodically deposited into a fund is known.
amortization, to provide for the repayment of a debt and it occurs that it is necessary to determine the
debt term, or the number of deposits needed to accumulate the required amount in the
background.

Formula:

S=R (1+i)n -1
i
Isolating, we have:

(1+i)n =1+ S*i

R

Example:

Monthly deposits of $800 are made into a fund that pays 18% interest, compounded monthly. They
wants to gather $28,000. How many deposits of $800 should be made?

Solution:

S= 28,000
R= 800
i= 0.18/12 <>0.015
n=?

(1+i)n=1+ S*i
R
(1.015)n=1+ 28000*0.015
800
Log 1.015 = Log 1.525
n * 0.00646 = 0.18326

n= 28.34 <> 28 months

Example 2:

A municipality wants to improve the aqueduct of the population and needs $20,000,000 for that.
studies indicate that contributions can yield an amount of $150,000
semiannual net contributions to the project's amortization fund. If the interest of 6% is obtained
capitalizable semiannually. Find the time that should be set to collect the value of the issuance
of bonds that cover the improvements of the aqueduct. (Round to the nearest whole number).

Solution:

S=20 000 000

R= 150,000
i = 0.06 / 2 is not equal to 0.03

n=?

(1+i)=1+ S*i
R
(1.03)n =1+ 20 000 000*0.03
150,000

n Log 1.03 = Log 5

n * 0.012837 = 0.698970

n = 54.449 semesters <> 27.22 years

10. FRENCH SYSTEM

The French amortization system consists of the amortization of a loan.

(generally a mortgage) through a constant income of installments. This is one of
the most commonly used systems by banks to amortize a loan. Its main
The characteristic lies in that the amortization quota is constant for the entire period.
from the loan, in fixed-rate credits.

Its calculation may seem complex, but broadly speaking we can summarize by saying that
the capital amortization acts in an increasing manner, while the interests
they depreciate in a declining manner. The main disadvantage of the French system is that, if
you have the possibility to prepay the loan in the short or medium term, the capital
debt will be higher compared to other payment methods.

Each installment or annuity is the sum of the interest payment and the principal repayment of
capital corresponding to the period in question. This method of amortization is also
It is called 'progressive', since, as time goes by, the amount of the fee
the amount allocated for capital amortization is increasing, while the amount paid for
interest will decrease (since there will be less and less principal balance to amortize).

Characteristics of the French Amortization System:

Growing capital amortization quota.
Service fee CONSTANT.
Decreasing interest rate.

Loan amount:

[ ]
n
(1+i ) −1
V =C n
( 1+i ) ∗i

Annuity:

The annual fee is calculated according to the following formula:

C=V
[ ( 1+i ) ∗i
n
(1+I ) −1 ]
Where:

C = Payment fee
V = Amount of the mortgage loan
i = Interest rate for the period
n = Number of installments

Interest rate:

The interest of each installment is obtained by applying the corresponding interest rate to the capital.
of the pending loan to be amortized.

I ( p−1; p ) =i∗V( p−1)

i∗C∗(1+i)n−( p−1)−1
I ( p−1; p
)= (1+i)n−( p−1)∗i

I (p - 1, p) = Interest rate of the period

i= Interest rate
V (p - 1) = Principal of the outstanding mortgage loan to be amortized

Amortization fee:
It corresponds to the part of the installment allocated to amortizing the principal. The installment of
The amortization for a year is always equal to the difference between the annuity and the payment of
interest of that same year.

p =C−i∗V( p−1)

i∗C∗(1+i)−( p−1)−1
tp=C−
(1+i)n−(p −1 )∗I

Total amortized:

It is equivalent to the sum of all amortization payments made up to a certain period.

That is, the total capital that has already been paid off.

t 1∗( 1+i ) p −1
Tp=
i

Number of periods:

C
log
C−V∗I
=
log(1+I)

Interest rate:

Ip=C−t 1(1+ i) p−1

Loan balance:

C∗(1+ I)n− p−1

Vp=
(1+ i)n− p∗i

Example:

A small textile businessman acquires two overlock machines and a cutter for UM 15,000.
for your payment in 12 equal monthly installments. The first payment will be made one month after
the purchase has been made. The businessman believes that in 5 months he can pay, in addition to the
monthly payment, an amount of UM 3,290 and to settle his debt, he would like to continue paying the
the same monthly payment until the end. This additional payment will reduce the number of
installments. Calculate on what calendar date the debt will be fully paid off, the purchase is
It took place on January 1, 2003, and the interest rate is 4.5% per month.
Solution:

VA = 15,000
n = 12
i = 0.045
C=?

1st We calculate the value of each of the twelve installments:

[ ]
12
0.045 (1+0.045 )
C=15,000 12
=1,645.99
( 1+ 0.045 ) −1

Syntax:

PAY(rate, N° per, V, Vf, type)

RATE Number of periods V Vf TYPE PAYMENT
0.045 12 -15,000 1,644.99

2nd We prepared the AMORTIZATION TABLE OF THE FRENCH SYSTEM:

By paying the additional UM 3,290 to the fifth month's installment, we have a balance of UM 6,403.
since the monthly payments must be UM 1,644.99, we calculate the months remaining until
the debt is settled

V = 6,403
i = 0.045
C = 1,645
n=?

years This balance. interest [Link] Settled. End vcto

0
1 15000 675 970 1644.99 14030 01/01/2003
2 14030 631 1014 1644.99 13016 01/02/2003
3 13016 586 1059 1644.99 11957 01/03/2003
4 11957 538 1107 1644.99 10850 01/04/2003
5 10850 488 4447 4934.99 6403 January 5, 2003
6 6403 288 1357 1644.99 5047 January 6, 2003
7 5047 227 1418 1644.99 3629 01/07/2003
8 3629 163 1482 1644.99 2147 01/08/2003
9 2147 97 1548 1644.99 599 01/09/2003
10 599 10 599 608.64 0 October 12, 2003
0.2195 10
1645 + 3290 = 4935
 [ ]
6403
n=,
log[1−
( 1645 )∗0.045] =4.37
1
log( )
1.0.045

Syntax:

Number of periods (rate, payment, V, Vf, type)

RATE Number of periods V Vf TYPE PAYMENT
0.045 4.37 -6403 1,644.99
0.37*30 = 11 days

Response: The debt payment decreases in almost three months, due to the additional payment in the fifth.
Yes, the obligation is settled on 12/10/2003, with the last installment of UM 609. The last installment
it contains the final balance (599) and the interest for 11 days

11. GERMAN SYSTEM

After the French system, the German amortization system is the most widely used.
in mortgage loans. Unlike the French system, which has fixed installments, in
In the German system, the capital is amortized in a constant manner, while in the French system you pay.
always the interests first. What happens in the German system is that when
We are halfway through the deadline, 50% of the actual price will have been paid.
housing, when in the French system you will have mainly paid interest.

The disadvantage is that the contributions are not all equal in the German System, at first.
are older, while the French remain constant. If you think about canceling
if you will pay off the loan early at some point, it is advisable to choose the German system.
due to the fact that the first payments consist mostly of principal and their balance
debt will be less than under the French system.

Characteristics of the German Amortization System:

Constant capital repayment fee.

Decreasing service fee.
Decreasing interest rate.

The German amortization system is characterized by paying interest rates on

advance in each installment. It is important to note that the interest rates to be paid are
they calculate on the outstanding balance to be paid, which gradually decreases to the
long over time.

Periodic amortization:

The part of the amount that corresponds to amortizations is the one that results from dividing the value.
nominal credit for the number of periods in which the principal will be repaid:
 V
tp=
n

Periodic interest:

On the other hand, interest is calculated on the balance of the principal that has not yet been
canceled

Ip=debt∗i

V
I ( p−1; p ) =
n
[ n− ( p−1 ) ]∗i

Total fee:

Therefore, the calculation of the total fee is determined by the sum of both.
components:

V
C= [1+i∗(n− p+1)]
n

Loan balance:

V
Vp= ∗ n( − p)
n

Example:

Onepersontake a loan of UM 4,000 to be repaid in 24 monthly installments

equal, with an interest rate of 3.85% per month. Calculate the value of each installment and prepare the
payment schedule.

Solution:

V = 4,000
i = 0.0385
n = 24
C=?

AMORTIZACIÓN = 4000/24 = 166.67

We prepare the GERMAN AMORTIZATION SCHEDULE OF THE DEBT:

 years This balance. interest [Link] Balance. End
0 4000
1 4000 154 166.67 320.67 3833.33
2 3833.33 147.58 166.67 314.25 3666.67
3 3666.67 141.17 166.67 307.83 3500
4 3500 134.75 166.67 301.42 3333.33
5 3333.33 128.33 166.67 295 3166.67
6 3166.67 121.92 166.67 288.58 3000
7 3000 115.50 166.67 282.17 333.33
23 333.33 12.83 166.67 179.50 166.67
24 166.67 6.42 166.67 173.08 0

13. AMERICAN SYSTEM

The American System is a method of amortization based solely on the payment of

interest through the installments of each period, while the capital is amortized
only once with the last installment, that is, when the credit expires.

The payments, from the first to the penultimate, are calculated based on the following expression:

Periodic Installment = Initial Capital x i

Where i is the interest rate and the initial capital is the total amount borrowed and n corresponds to
number of credit periods.

The last installment is calculated according to the following formula:

Final Quota = Initial Capital + (Initial Capital x i)

Where again i corresponds to the interest rate, and the initial capital is the total amount.
borrowed.

Pure American system

Characteristic:

In this loan amortization system, interest is paid periodically on the balance of.
the debt, but a single repayment is made at the end of the period. That is, along with the last
interest fee cancels the debt by paying the capital all at once.
Interest: If the rate remains constant throughout the period, it is calculated:

Ip=i∗P∗V

Mixed American system

Characteristic:

This system establishes that the debtor, in addition to paying interest, simultaneously makes a
periodic saving with the aim of gathering enough money at the end of the term to settle the
owed capital.

Savings quota:

the formula for the final value of due installment is used.

( 1+i ) −1
A=
i

In conclusion, if it is an obligation for which interest is paid and the capital is settled at
At the end of the established deadline, we are facing an American system. If the disbursement
it implies, in addition to the interest fee, a periodic savings; the system is a mixed American one.

Example:

Let's imagine a loan with an initial capital of €10,000 (Co), for which they charge us the
bank an effective annual interest rate (i) of 3% and to be paid in 5 years (n). The table of
The amortization would be the one we show below:

Solution:

C: 10000
i: 3%
n: 5

Amortization schedule:

years Annuity Love. interest. Cap. Cap.

Cap. [Link].
0 0 0 0 0 10000
1 300 0 300 0 10000
2 300 0 300 0 10000
3 300 0 300 0 10000
4 300 0 300 0 10000
5 10300 10000 300 10000 0