Chapter 9–Exercise Solutions

FORMULÁRIO
Short-Term Loans (Simple Interest)
1
i 1 n
Effective linear rate il* Exponential effective rate ie* 1
1 I n 1 i n
Long-term Loans
Basic Relationships
n Rk
C k
; Sk 1 I S k 1 ; Sk Sk Rk ; Sk1i Sk 1 Rk ; SkSk 1 Ak
k 1 1i
Ak Rki Sk 1 ; RkA Jk
k (case yes have I Sk1Rk );
J kcminRk;i Sk1;Jkdi Sk 1 ;

French Method or Price Table

 1 i 1  n i  1 I  n C C i
C R R a ; R C ; A1 C
i  1 i 
n ni
 1 i 1 n an i sn i  1 i 1  n
1 k
Ak A1i
1 ;k1,2,,n ;
Period Outstanding Balance Amortization Interest Provision
0 C - - -
C
1 S1 C A A1 J1 I C R A1 R
1
sn i

2 S2 S1 A 2
A2 1 i 
A 1
J2 i S1 R A2 R
3 S3 S2 A 3
A3 1 i A 2
J3 i S2 R A3 R
: : : : :
n Sn Sn1 A 0A
n
1 i n A  n1 Jn I Sn1 R A n R

Retrospective Method
 1 i 1 k
Sk C A  A 1  A2 C A k
C sk i
i  1 i 1  k
k ; Ak C ; Sk C 1
sn i  1 i 1
n
 1 i 1  n
i
Prospective Method
 1 i  nk  1 1 1 i  k n
Sk R R R ank;i SkSk R ;
i  1 i 
n k
i

Recurrence Method
 1 I 1 k
Sk C  1 i R k
C 1 i R
k
s ki
i

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 Chapter 9 - Exercise Solutions

FORMULARY

m h1
1i 1i
Accumulated Interest between the periods J m h1R C n
1i 1

American Method or 'Sinking Fund'

Outstanding Balance Amortization Interest Provision

Period
0 C - - -
1 C - i C i C
2 C - i C I C

n-1 C - i C i C
n 0 C i C i C C

i i
Sinking Fundq C ; R C I q C i C
 1 I 1  n
 1 i 1 
n

German Method or Advance Interest Method

Period Outstanding Balance Amortization Interest Provision

0 C J0 C i C I
C I
1 C A S1 A1 R  1 i 
n1
J1 RA1 R
1
1 1 I n
A1
2 S1 A S2 A2 J2 R A R
2
 1 I  1 2

A1
3 S 2 A S A3 J3 R A R
3 3
 1 I  2 3

: : : : :
A1
n-1 Sn2 A S An1 J n1 R A R
n1 n1
 1 I  n2 n1

A1 A1
n Sn1 A S 0 An Jn R A 0 R An
n n
 1 i  n1 n
 1 I 
n1

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 Chapter 9–Exercise Resolution

FORM

Constant Amortization System

C k k 1
A1 A2 An A ; A ; Sk C 1 ; Jk i Sk 1 I C 1
n n n

1 i C
Rk C  I  k 1  ;
n n

Period Outstanding BalanceAmortization Interest Service

0 C - - -
1 C1 1n  C n i C R1 C  i 1n 
2 C1 2n  C n  1n
i C1  R2 R1I C n
3 C1 3n  C n  2n
i C1  R3 R2 i C n
: : : : :
n 0 C n I C1 n 1n  Rn C  1 in

Mixed Amortization System

C C
RkTP f ;RkSAC 1 f  1 i  n k 1 ;  R Rk R TP
k
SAC
k ;
an i n

f  1 i 
k 1
C n f ank i k
Ak 1 f ;Sk C  1 1  f 
n sn i an i n

n 1
k INTn 1  1 1
an i i

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 Chapter 9–Exercise Resolution

9.9—Proposed Exercises

A certain individual incurred a debt of R$ 200,000.00, to be redeemed in 2 years.

in monthly installments, considering the interest rate of 12% per year compounded monthly. Build the Table of

Amortization for each of the following amortization systems.

a) French Method
b) American Method with formation of sinking fund at a rate of 6% per year.
c) German Method
d) Constant Amortization System
e) Mixed Amortization System (40% of TP and 60% SAC)

Solution

a) French Method

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 Chapter 9–Exercise Resolution

b) American Method with sinking fund formation at a rate of 6% per annum.

c) German Method

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 Chapter 9–Exercise Solutions

d) SAC

e) SAM (40% TP/ 60% SAC)

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 Chapter 9–Exercise Solutions

A certain individual incurred a debt of R$ 200,000.00, to be redeemed in 2 years,

in monthly installments, with a one-year grace period, of amortization and interest, at a rate of 12%
a.a.c.m.. Build the Amortization Schedule for each of the following systems of
amortization.
a) French Method
b) American Method with sinking fund formation at an interest rate of 6% per annum.
c) German Method
d) Constant Amortization System
e) Mixed Amortization System (40% of TP and 60% SAC)

Solution

a) French Method

Note

In the spreadsheets, we are showing, over the deferral period (that is, over the period
from the lack of amortization and interest), the interest due; which, for not having been paid,
they imply an increase in the outstanding balance.

During the deferral period, accounting interest is null; it starts to coincide with the
interest due after the deferral period.

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 Chapter 9 - Exercise Solutions

b) American Method with sinking fund formation at a rate of 6% per annum.

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 Chapter 9 - Exercise Resolution

c) German Method

Note

We opted to divide this exercise into two parts. In the first part, related to the deadline
grace period, we calculate the outstanding balance (R$ 225,365.01) at the end of the grace period, as if
no interest would be paid.

In the second part, regarding the amortization period, as in the German system, the interest is
advanced, the balance at the end of the grace period must be used to calculate the interest that
must be paid at the beginning of the 13th period (end of the 12th period). That is, there are two installments.
of interest: one related to the 12th grace period (R$ 2,231.34), which is not paid and is incorporated
to the outstanding balance, and another related to the 13th period (R$2,253.65) which is paid at the end of the 12th
period (beginning of the 13th period).

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 Chapter 9 – Exercise Solutions

d) SAC

e) SAM (40% TP/ 60% SAC)

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 Chapter 9 - Exercise Resolution

A certain individual incurred a debt of R$ 200,000.00, to be redeemed in 2 years.

in monthly installments, with a one-year grace period for amortization, at an interest rate of 12% per annum.

Build the Amortization Schedule for each of the following amortization systems.
a) Método Francês
b) American Method with sinking fund formation at a rate of 6% per annum.
c) German Method
d) Sistema de Amortização Constante
e) Mixed Amortization System (40% of TP and 60% SAC)

Solution

Noting that, throughout the entire 24-month period, the accounting interest coincides.
with the owed interest, we have:

a) French Method

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b) American Method with formation of sinking fund at a rate of 6% per annum.

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 Chapter 9 – Exercise Resolution

c) German Method
Once again, we chose to divide the problem into two parts. The first, with 12
grace months, where the interest is paid at the end of each month; the second, related to
amortization phase, which begins at the start of the 13th period (end of the 12th period).
Logo, at period 12 there are two interest payments: the one related to the 12th period of
shortage and the interest related to the anticipation of the 13th month (related to the German method).
That is, R$ 4,000.00 is paid in interest at the end of the 12th period.

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 Chapter 9 – Exercise Resolution

d) SAC

e) SAM (40% TP/ 60% SAC)

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 Chapter 9 – Exercise Resolution

A certain individual incurred a debt of R$ 200,000.00, to be settled in 2 years.

in 24 monthly installments and 4 semiannual installments of R$ 20,000.00, at an annual interest rate of 12%.
Build the Amortization Schedule for each of the following amortization systems.
a) French Method
b) American Method with sinking fund formation at a rate of 6% per annum.
c) German Method
d) Constant Amortization System
e) Mixed Amortization System (40% of TP and 60% SAC)
Solution
The semiannual rate equivalent to the monthly rate of 1% is:

is 1 i6 1 m 1 0.016  1  or 6.152% p.a.

0.06152
a) French Method
The value of the monthly installment must be obtained by the following value equation:

 1 0.01 1  24  1 0.06152 1  4
200000 Rm  20000
0.01  1 0.01  24 0.06152  1 0.06152  4
130938,4421
Rm R$ 6.163,727
21.243387

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 Chapter 9 - Exercises Resolution
b) American Method with formation of sinking fund at a rate of 6% per annum.
In this case, we are considering the payment of the 4 semesters, which can be
understood as extraordinary amortizations and the sinking fund to form the balance of
R$ 120,000.00 = 200000 - (4 × 20000).

c) German Method
First, we must find the amount that will be paid in monthly installments.
This value will be the financed amount minus the present value of the semi-annual payments.
R$ 20,000.00. To this end, we will work with the corresponding effective rate.
semester. How
is 1 i6 1 m 1 0.016  1  or 6.152% a.s.
0.06152
one has
1 1 1
1 is* is* 1 1 0.06555 or 6.555% a.s
1 is 1 is 1 0.06152
We can divide the funding into two parts. The first, Cs, to be paid by the
semiannual installments and the second, Cm, through the monthly installments. The amount of Csit can be
obtained by:

 1 i s C s 20000 
20000

20000

20000
 1 i s  1 i s   1 i s  s1 i* 4
*
1
*
2
*
3

1 20000 20000 20000 20000

Cs   
1 0.06152  1 0.06555  1
 1 0.06555  2
 1 0.06555  3
 1 0.06555  4

Cs 1.06555 68429.95 R$ 72.915,72

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 Chapter 9 - Exercise Solutions
The following spreadsheet shows the Amortization Table of the financed portion by the installments.
semesters. Note that in this table the formulas used are those presented in
schematic diagram of section 9.4, only considering the period as the semester, and
the equivalent semiannual rate.

The second part of the funding will be provided by:

Cm 200000 72915.72 R$127.084,28

Therefore, the monthly payment must be:

127084.28 0.01
R R$ 5.929,60
1 1 0.01  24
The following spreadsheet relates to the financing of the monthly part.

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 Chapter 9 - Exercise Resolution

d) Constant Amortization System

There will be 4 semiannual installments of R$ 20,000.00, which correspond to the amount
presentCs , and given by:
 1 0.06152 1 4

Cs 20000 R$ 69.061,58
0.06152  1 0.06152 
4

Therefore, the valueCm what will be recovered by the monthly installments is:

Cm 200000 69061,58 R$130.938,42

In this way, we will have semiannual [Link] monthly amortizationsm ,
respectively equal to:
69061.58
As R$17.265,39
4
130938.42
Am R$ 5.455,77
24
This leads us to the following Amortization Schedule (already consolidated)

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 Chapter 9–Exercise Resolution

e) SAM (40% TP and 60% SAC ratio)

In this case, we are assuming that the semiannual installments will be distributed accordingly.
proportion between TP and SAC; that is, R$ 8,000.00 and R$ 12,000.00, respectively.
In the case of the SAC, we have that the financing related to the semi-annual installments and
quarterly are, respectively:
 1 0.06152 1 4

CsSAC 12000 R$ 41,436.95

0.06152  1 0.06152 
4

CmSAC 120000 41436.95 R$ 78.563,05

That correspond to semi-annual amortizationsASACthe
S
monthly amortizationsAmSAC, de:
41436.95
AsSAC R$10.359,24
4
78563.05
AmSAC R$ 3,273.46
24
For the financing installment according to the Price Table, we will have that the value of the
The monthly payment must be obtained by the following value equation:

 1 0.01 1  24  1 0.06152 1  4
80000 Rm  8000
0.01  1 0.01  24 0.06152  1 0.06152  4
80000 27624,63272
Rm R$ 2,465.49
21.243387
The calculation made for the two parts of the method is shown in the following spreadsheet.

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 Chapter 9–Exercise Resolution
What is consolidated is given by:

Note

Note that the Amortization Table above presents each element as data.
by 40% of the corresponding element of the Table Price case, added to 60% of
corresponding element of the SAC case.

5) Suppose there is a loan of R$ 200,000.00, at a compound interest rate of 6% per year, to

to be amortized according to the French method through 10 annual installments, the first
winning a year after the date on which the commitment was made. If the debtor
resolve to settle your debt, all at once, right after and right before the payment of the 6th
installment, how much will you have to pay? Solve using the method:
a) Retrospective
b) Prospective
c) Recurrence

Solution

a) Retrospective Method
The outstanding balance right after the payment of the 6th installment is given by:

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 Chapter 9 - Exercise Solutions

 1 0.06 1  6
S6 200000 1 R$ 94.159,36
 1 0.06 1  10
The outstanding balance just before the payment of the 6th installment is given by:

 1 0.06 1  5
S6 200000 1  1 0.06 R$121.332,96
 1 0.06 1  10
b) Prospective Method
We first need to find the payment to be made on the financing, which is
given by:

0.06  1 0.06  10
R 200000 27173.59
 1 0.0610 1
Therefore, the balance right after the payment of the 6th installment is:

1 1 0.06  610

S6 27173,59 R$ 94,159.36
0.06
And soon before the payment of the 6th installment is:

S6 S6 R 94159.36 27173.59 R$121.332,95

c) Recurrence Method
Using the calculated installment amount from the previous item, we have the balance immediately after the
payment of the 6th installment given by:

 1 0.06 1  6
S6 200000 1 0.06 27173.59
 6
R$ 94,159.36
0.06

And soon before the payment of the 6th installment is:

S6 S6 R 94159.36 27173.59 R$121.332,95

6) Let's consider a loan of R$ 100,000.00, at a compound interest rate of 12% per year, to the
to be amortized through 10 annual installments, the first maturing 1 year after the
date on which the commitment was made. If the debtor decides to settle their debt, in a
Only once, right after and just before the payment of the 6th installment, how much will he have to pay?
Solve it without building the Amortization Table, using the amortization method:
a) SAC
b) SAM (40% TP and 60% SAC proportion)

Solution

a) SAC
In the case of the SAC, the amortization of the balance is constant, and the balance right after the payment
the 6th installment is:

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 Chapter 9 - Exercise Resolution

C100000
A R$10.000,00 S6 100000 6 10000 R$ 40.000,00
n 10
or alternatively
6
S6 100000 1 R$ 40,000.00
10
And the balance just before

5
S6 S 5 1 I 100000
 1  1 0.12  R$ 56,000.00
10
b) SAM (proportion of 40% TP and 60% SAC)
0.4 a106 12% 6
S6 100000  1  1 0.4 
a10 12% 10
0.4 3.037349
100000  0.6 R$
 0.4  45,502.51
5,650223
0.4 a 105 12% 5
S6 S 5
1 i 100000
  1  1 0.4  1 0.12 
a10 12% 10
0.4 3.604776
100000  0.6 1 0.12
 0.5  
R$ 62.181,87
5.650223
The Epsilon bank, for loan operations with a term of 4 months, is making
advance charge of interest, at a rate of 4% per month.

If you want to earn, in real terms, an interest rate of 4% per month, what proportion of the loan
it should retain as a monthly average balance, if it is estimated that the monthly inflation rate is:

at 2% per month?
b) of 3% per month?

Solution

Monthly fee charged by the bank for a short-term loan.

months, the cash flow, at current prices, which describes the operation, can be
schematically represented as:

Thus, the monthly inflation rate was, at prices from the date of the loan,
cash flow is:

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 Chapter 9 - Exercise Resolution

Therefore, in real terms, the effective monthly rate, denoted byi * , it is such that:

E1 
 1 i *  n
E  1 I n
 1 I  n

Consequently, the values ofi, n, i* I, the proportion of retention must

be such that:

 1   1 
 1 i *   1 i *   1 i  
n n n
 1 i n 1 i n *

 1 I  n
 1 I  n
 1  i*    
n n
1 i n 1 I  1  n 1 i* 1 I n
 1 i     
n n
1 i n 1 I*  1 1 i 1 I 1 
*
n
  
n
 1 i n  1 i 1 *I  1

 1 i  1 I 1 
*
n n

*
a) Considering i = 4% per month, n = 4 months,i = 4% per month and I = 2% per month, it follows:

 1 0.04 4  1 0.04

  1 0.02 1  4

0.2392 or 23.92%
 1 0.02  1 0.04 1  4

That is, Bank Epsilon must withhold 23.92% of the loan amount as a reserve.
average balance.

b) Keeping the other parameters unchanged, and with I = 3% per month, we have

 1 0.04 4  1 0.04

  1 0.03 1  4

0.3348 or 33.48%
 1 0.04  1 0.03 1  4

That is, Epsilon bank should withhold 33.48% of the loan amount.

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 Chapter 9–Exercise Resolution

8) João, having obtained financing of R$ 300,000.00, at a rate of 2.8% per month, for the term of
20 years old, with constant monthly payments, received an inheritance worth
R$ 75,000.00, 20 days after the payment of the 170th installment.

If, on this same date, an extraordinary amortization is made with the total amount of
inheritance, what will be the proportion of reduction in the value of your installment, if the following are maintained
original deadline and the interest rate of 2.8% per month?

Solution

The value of the original installments, R, was such that:

300000 0.028  1 0.028  240

300000 R a240 2.8% R R$ 8.411,13
 1 0.028240  1
Shortly after the payment of the installment of order 170, your outstanding balance was:

8411.13 1 0.028 1  70

S170 8,411.13 a240170 2.8%
R$ 256.928,65
0028  1 0.028  70
Therefore, 20 days later, the outstanding balance was:

S 256928.65  1 0.028  20/30 R$ 261,702.54

Thus, due to the extraordinary amortization, your outstanding balance was reduced to:

S 261702.54 75000 R$186.702,54

Maintaining the interest rate of 2.8% per month and the number 70 of remaining installments, the
the new value of the monthly installment, R', must be such that:

186,702.54
R a70 2.8%
 1  0.028  20/30

or

186.702,54 1  0.028 1  70
R R$ 6.000,63
 1  0.02820/30 
0.028 1  0.028  30

Consequently, the original payments would be reduced by

6000.63
1 0.2986 or 29.86%
8411.13

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 Chapter 9–Exercise Resolution

9) The Teta bank, for loans with a term of 2 months, adopts the following system:
Being the amount of the requested loan, it charges upfront interest at the monthly rate.
pelos 2 meses (ou seja, retém a quantia J 2 I E);
retains the proportion Eof the loan, as a way to compose the average balance;
At the end of the first month, the borrower must pay half of the amount.
requested, while simultaneously releasing half of the average balance requirement;

at the end of the 2-month period, the borrower must pay the other half of
borrowed amount, with the second half of the requirement being released simultaneously
average balance.

It is requested:

a) specify the cash flow that, from the bank Teta's perspective, characterizes the
operation;
b) The value of the effective monthly rate, sei= 3.5% per month, 15%It is R$ 10,000.00;
Solution

a) From the perspective of the TETA bank, the cash flow that characterizes the operation is:

a 0  E J E E 1 2i  
a1 E  1 2
a2 E 1 2

b) The effective monthly ratei , it will be such that:

E  1  E  1 
E  1 2i  
2  1 i  *
2  1 i  *
2

you

 2  4i 2 
1 i*  1  1 i  1   0  
2
*


Beingi 3.5% per annum 15%and making oneselfx 1 i* it has:

 2  4 0.035 2 0.15x2  1 0.15x

 1 0.15 0  
or
1.56x2 0.85x 0.85 0

By solving the quadratic equation we have:

0.85 0.852 4 1,56 0 .85  0.85 6,0265 x1 1.059261

x
2 1.56 3.12 x2 0 .5144

Introduction to Financial Mathematics–Faro & Lachtermacher–Final Version Page 139

 Chapter 9 - Exercise Resolution

Howx 1 i* only the first root is valid; that is, i*=5.9261% a.m.

Considering the loan amount of R$ 10,000.00, the cash flow will be:

a 0 1 0000 1  2 0.035 0.15  R$7,800.00


a1 a 2 10000 1  0.15 2  R$4,250.00

b) Logo, using the HP 12 C, we have:

[f][REG] 7800[g][CF0] 4250[g][CFj][g][CFj] 5.9261

That is, the Teta bank will be charging an effective rate of 5.9261% per month.

10) Admit that the Teta bank, considered in Exercise 9, is examining the possibility of changing the
systematic of 2 payments, for that of a single payment at the end of the 2 term
months.

Considering 3.5% per month, 15%(as a composition of average balance) and

E = R$ 10,000.00, in the case of 2 payments, denoting by the retention rate
in the case of final payment, determine the amount of so that the rate is maintained
monthly effective of 5.9261% per month.

Solution

From the point of view of Teta bank, the cash flow that characterizes the operation, with a
single payment, it is:

a 0  E J E E 1 2i  
a1 0
a2 E 1 
The effective monthly ratei , it will be such that:
E  1   1 
E  1 2i  
1 i*  2

 1 2i 
,for E 0e1 2i 0
 1 i  *
2

1
1 2
i* 1
1 2i

Logo
1
1 2 1
0.059261 1 1,0592612
1 2 0.035 0.93
1 1.043492 1.122034 0.122034 0.043492
0.043492
0.356392 or 35.6392%
0.122034
In other words, Teta Bank will have to raise the withholding to 35.6392%.

Introduction to Financial Mathematics - Faro & Lachtermacher - Final Version Page 140