AMORTIZATION
WHAT IS AMORTIZATION?
Amortization is the process of
spreading out a loan into a
series of fixed payments.
WITH AMORTIZATION, THE
ORIGINAL AMOUNT OF THE LOAN
OR OBLIGATION IS KNOWN
(PRESENT VALUE).
PRESENT
VALUE OF Where:
AN
ORDINARY
ANNUITY
EXAMPLE
For example, if an ordinary annuity pays P50,000 per
year for five years and the interest rate is 7%, the
present value would be:
Given: i= r n= t(m)
m = 5(1) = 50,000 *
Pmt = = 50,000 *
50,000 =7% n=5 =50,000 * 0.287014
r= 7% 1 0.07
i=7% = 205,010
t= 5
Where:
A M O RT I Z AT I O N
PAY M E N T U S I N G
THE FORMULA
EXAMPLE
Ernesto buys a house and lot worth P5,500,000 to be repaid on a
semi-annual installment for 15 years. Find the semi-annual
payment if money is worth 16% compounded semi-annually.
Given: i= r n= t(m)
PV = 5, 500,000 m = 15(2) =
= 5,500,000 * 0.88827
r= 16% =
=16% n= 30
Pmt =488,548.50
t= 15 2
m=2 i=8%
AMORTIZATION SCHEDULE
An amortization table can help you
understand how your payments are
applied.
EXAMPLE
A debt of P40,000 is to be amortized by equal payments at the end of
every quarter for 1.5 years. If the interest charged is 12%
compounded quarterly, find the outstanding principal after each
payment is made.
Given: i= r
Pmt =7,383.90
n= t(m)
PV = 40,000 m =
r= 12% =12% 1.5(4)
t= 1.5 yrs 4 n=6
m=4 i=3%
AM ORTI ZAT I ON S C HED ULE
(1) (2) (3) (4) (5)
Period Outstanding Principal at Beginning Interest Due at End of Period Equal Payment at End of Each Portion of Principal Reduced by
of Each Period (2) x i Period Each Payment
(2) - (5)* (4) - (3)
1 40,000.00 40,000.00 7,383.90 7,383.90
x 3% -1, 200
1, 200 6,183.90
7,383.90 7,383.90
-1,014.48
2 40,000.00 33,816.10
-6,183.90 x 3%
33,816.10 1,014.48 6,369.42
7,383.90 7,383.90
-823.40
3 33,816.10 27,446.68
-6,369.42 X 3%
27,446.68 823.40 6,560.50
7,383.90 7,383.90
-626.59
4 27,446.68 20,886.18
-6,560.50 X 3%
20,886.18 626.59 6,757.31
7,383.90 7,383.90
-423.87
5 20,886.18 14,128.87
-6,757.31 X 3%
14,128.87 423.87 6,960.03
7,383.90 7,383.90
-215. 07
6 14,128.87 7,168.84
7,168.84
- 6,960.03 X 3%
215. 07 7,168.83
7,383.91
-215. 07
7,383.91
7,168.84
TOTAL 7,168.84 - 7,168.84 4,303.41 44,303.41 40,000.00
0
TYPES OF AMORTIZING LOANS
Auto Loans
it is a loan that usually takes 5
years or shorter with a fixed
monthly payment.
TYPES OF AMORTIZING LOANS
Home loans
These are often 15-year or 30-year fixed-rate
mortgages, which have a fixed amortization
schedule, but there are also adjustable-rate
mortgages (ARMs). With ARMs, the lender
can adjust the rate on a predetermined
schedule, which would impact your
amortization schedule.
TYPES OF AMORTIZING LOANS
Personal loans
These loans, which you can get from a
bank, credit union, or online lender,
are generally amortized loans as well.
They often have three-year terms,
fixed interest rates, and fixed monthly
payments.
END OF DISCUSSION
