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Chapter 5
• Amortisation
• Sinking fund

1. AMORTISATION

• Paying back something using payments for example car or home loans.
• It is created by using equal payments with equal time periods => annuity.
• Use ordinary annuity ani formula as PV is known:

P = Ra n i
or

𝑷
𝑹=
𝒂𝒏𝒏
• In case of amortisation we need to determine the size of the payments (R). You do not have
to change the formula P = Rani to R = P/ani when using the financial mode of your
calculator as the calculator does that for you. You just enter the values you have and
press the one you need (PMT) last.

Amortisation schedule
• The payment R and PV consist of an interest and capital amount.
• In the beginning you pay more towards interest than capital.
• To determine the amount still outstanding after each payment and the amount of interest paid
in each period use amortisation schedule - example 5.2.
• Applicable interest rate can be calculated using I = Prt where t is the period of the payments.
For example: yearly payments t = 1; weekly payments t = 1/52; monthly payments t = 1/12…
• See 2 videos on myUnisa under Announcements regarding Amortisation.

Total real cost of a loan

• The total real cost of a loan is the total PV value of the loan at the inflation rate minus the
size of the loan (PV).

ID:
• Paying back car or house
• amortisation or
• amortisation schedule or
• real cost of a loan

Calculator use financial mode. Ordinary mode takes long

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Calculator example 1

The following is an extract of an amortisation schedule:

Year Amount at Interest due Payment Amount paid back Amount at

beginning of year end
year
(1) (2) (3) (4) (5)
1 12 000 1 200,00 3 165,57 1 965,57 A
2 A 1003,44 3 165,57 2 162,13 7 872,30
3 7872,30 B 3 165,57 2 378,34 5 493,96
4 5 493,96 549,40 3 165,57 C D
5 D 287,78 3 165,57 2 877,79

Determine the values of the variables and the applicable interest rate.

ID: amortisation schedule

(a)
A(col 5) = col 1 – col 4
= 12 000 – 1 965,57
= 10 034,43
B(col 2) = col 3 – col 4
= 3 165,57 – 2 378,34
= 787,23
C(col 4) = col 3 – col 2
= 3 165,57 – 549,40
= 2 616,17
D(col 5) = col 3 – col 2
= 3 165,57 – 287,78
= 2 877,80

(b) Applicable interest rate:

I = Prt
= 5493,96 × r × 1
549,40
5493,96
r=
549,40
= 0,10

The applicable interest rate is 10% per year.

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Calculator example 2

Joseph bought a house and after making a down payment of 25% on the price of the house, he
managed to secure a loan at an interest rate of 12,75% per year compounded monthly for a
period of 20 years. His monthly payment is R17 307,17. Determine

(a) the size of the loan.

(b) the price of the house.
(c) the real cost of the loan if an average inflation rate of 6,9% per year is expected.

(a) His monthly payment is R17 307,17. Thus in total

P = Ra ni

= 17 307,17a 20×12 0 ,1275 ÷12

= 1 500 000,00

The size of the loan is R1 500 000.

(b) If the price of the house is x then

100 % 25% 75%

x 1 500 000

Now
75% = 1 500 000
100% = x
Thus
1500000 100
Price of house = ×
75 1
= 2 000 000,00

The price of the house is R2 000 000,00.

(c) The total real cost of a loan is the total PV value of the loan at inflation minus the size of the
loan (PV). Now the total PV value of the loan at inflation:

Tv = Ran r
= 17 307,17a20×12 0,069÷12
= 2 249 707,33
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The total real cost of the loan is the total PV value of the loan at inflation minus the size of the
loan (PV).

T=
r
Tv − P
= 2 249 707,33 − 1500000
= 749707,33

The real cost of the loan is approximated R749 707.

2. Sinking fund

• A sinking fund is nothing other than a saving account that is created so that you will have
capital available on a specific date in future for example to pay back a loan.
• It is created by using equal payments with equal time periods => annuity.
• Use ordinary annuity sni formula as the future value(loan that have to be paid back) is
usually known.
• Formula:
S = Rs n i
• Cost of sinking fund in one year = Fund payments in one year + interest paid on loan in one
year

ID: Sinking fund or equal payments in equal time periods + compound interest

Calculator: financial mode

Calculator example 1

You bought a candy floss machine and borrowed money at an interest rate of 12% per year
compounded semi-annually. An amount of R10 000 is payable in five years’ time. This debt will
be discharges by the sinking fund method. The fund will earn 9% interest per year, compounded
monthly.

(a) Determine the monthly sinking fund deposits.

(b) Calculate the total yearly cost to pay off the debt.

ID: sinking fund

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Loan:
0,12/2 R10 000

Pay
Saving in sinking fund to pay back loan: back
?R ?R ?R ?R R10 000 loan

0,09/12

Payments form an annuity, FV known => use sni formula:

S = Rs n i
S = 10 000
n= 5 × 12
= i 0,09 ÷ 12
10 000 = Rs 5×12 0,09÷12
R = 132,58

The monthly deposits are R132,58.

(b) The total yearly cost = the deposits into sinking fund + the interest paid on loan

The interest paid on loan per 6 months is 12% per year, compounded semi-annually:

I = PRT
6
= 10000 × 0,12 ×
12
= 600

The payments into sinking fund: 132,58 per month

The total yearly cost = the deposits into sinking fund + the interest paid on loan

= (132,58 × 12) + (2 × 600)

= 1 590,96 + 1 200
= 2 790,96

The total yearly cost is R2 791.