AMORTIZATION
Amortization is any method of repaying debt, the principal and interest included, usually by a series of equal payment at
equal interval time.
Example No.1
A debt of Php. 5,000 with interest at 12% compounded semi-annually is to be amortized by equal semiannual payment
over the next 3 years, the first is due in 6 months. Find the semiannual payment and construct an amortization schedule
Period Outstanding principal at Interest due to end Payment Principal repaid at
beginning of period of period end of period
1 Php 5,000
TOTAL
Example No.2
A debt of Php 10,000 with interest at the rate of 20 % compounded semiannually is to be amortized by 5 equal
payments at the end of each 60 month, the first payment is to be made after 3 years. Find the semiannual payment and
construct an amortization schedule.
Period Outstanding principal at Interest due to end Payment Principal repaid at
beginning of period of period end of period
1 Php 10,000
10
TOTAL
UNIFORM ARITHMETIC GRADIENT
In certain cases, economic analysis problem involves receipts or disbursement that increase or decrease by a uniform
amount each period. For example, maintenance and repair expenses on specific equipment or property may increase by
a relatively constant amount each period. This is known as a uniform arithmetic gradient.
Suppose that the maintenance expense on a certain machine is Php 1,000 at the end of the first year and increasing at a
constant rate of Php 500 each year for the next four years.
𝑃 𝐺 (1+𝑖 )𝑛 1
, 𝑖%, 𝑛 = 𝑖 [ − 𝑛] [(1+𝑖 )𝑛], this factor is called the gradient to present worth conversion
𝐺 𝑖
factor, thus
P=A(P/a,i%,n)+G(P/G,i%,n)
P=Present worth of annuity + gradient present worth
1 − (1 + 𝑖)−𝑛 𝐺 (1 + 𝑖 ) 𝑛 − 1 1
𝑃 = 𝐴( )+ [ − 𝑛] [ ]
𝑖 𝑖 𝑖 (1 + 𝑖)𝑛
Example NO1.
Three counties in Florida agreed to pool tax resources already designated for county-maintained bridge refurbishment.
At a recent meeting, the country engineers estimated that a total of $500,000 will be deposited at the end of next year
into an account for the repair of old bridges throughout the three-county area. Further, they estimate the deposits will
increase by $100,000 per year for only 9 years thereafter, then cease. Determine the equivalent present worth if county
funds earn interest at a rate of 5% per year.
Example No. 3
A loan was to be amortized by a group of four end of year payments forming an ascending arithmetic progression. The
initial payment was to be Php 5,000 and the difference between successive payment was to be Php 400. But the loan
was renegotiated to provide for the payment of equal rather than uniform varying sums. If the interest rate of the loan
was 15%, what was the annual payment?
Example No. 4
Find the equivalent annual payment of the following gradient at 20% interest?
End of Year Payment
1 8000
2 7000
3 6000
4 5000
