The Engineering Economist

A Journal Devoted to the Problems of Capital Investment

ISSN: 0013-791X (Print) 1547-2701 (Online) Journal homepage: http://www.tandfonline.com/loi/utee20

New mathematical annuity models in a skip

payment loan with rhythmic skips

Abdullah Eroglu & Harun Ozturk

To cite this article: Abdullah Eroglu & Harun Ozturk (2016) New mathematical annuity models
in a skip payment loan with rhythmic skips, The Engineering Economist, 61:1, 70-78, DOI:
10.1080/0013791X.2015.1095382

To link to this article: http://dx.doi.org/10.1080/0013791X.2015.1095382

Accepted author version posted online: 02

Dec 2015.
Published online: 23 Feb 2016.

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 THE ENGINEERING ECONOMIST
, VOL. , NO. ,
http://dx.doi.org/./X..

TECHNICAL NOTE

New mathematical annuity models in a skip payment loan with

rhythmic skips
Abdullah Eroglu and Harun Ozturk
Department of Business Administration, Faculty of Economics and Administrative Sciences, Suleyman Demirel
University, Isparta, Turkey
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ABSTRACT
Formato derived a useful formula in which the amount of periodic pay-
ment was equal in a skip payment loan with arbitrary skips. Formatos
model was improved by Moon in a geometric-gradient series. Eroglu
and Karaoz rederived Formatos result to the case where periodic pay-
ments occur in a linear-gradient series. In this study, general formulas
are derived for payment loan models in which a certain number of peri-
odic payment amounts are determined by the customer at the begin-
ning of the loan term and the other payments are rhythmic skips with
split constant instead of random skips.

Introduction
A direct reduction loan consists of a series of equal (level) periodic payments uniformly
seperated in time. Indeed, bank loans repaid in equal periodic installments is a conventional
application. It is desirable that alternative payment loan plans offered by financial institu-
tions should fit the income flow of individuals whose ability to pay may vary during the year
depending on seasons or months.
A skip payment loan is a direct reduction loan in which certain payments are skipped com-
pletely. Formato (1992) derived a useful formula in which a periodic payment amount, d, is
equal in a skip payment loan with arbitrary skips. Formatos model was extended by Moon
(1994) for the case where periodic payments occur in a geometric-gradient series. Eroglu and
Karaoz (2002) extended the skip payment loan model using time value of money in which
periodic payments occur in a linear-gradient series.
Eroglu (2001) developed skipped payment loan models in which periodic payments change
in partially geometric and arithmetic series and skipped payments are arbitrary. The skip peri-
ods in previous studies in which installments are not made are chosen arbitrarily. Arbitrary
skips in installments means that periodic payments are interrupted with occasional nonpay-
ment periods that may also differ in duration. Recently, Eroglu and Ozdemir (2012) derived
a payment loan model that has rhythmic skips with split geometric constants.
Presenting different payment loan models instead of only a fixed installment model can be
valuable in reaching more customers. In this study, we propose general formulae for the pay-
ment loan models in which a certain number of periodic payment amounts are determined by

CONTACT Harun Ozturk harunozturk@sdu.edu.tr Suleyman Demirel University, Faculty of Economics and Administra-
tive Sciences, Department of Business Administration, Room Number , East Campus, nr, Isparta, Turkey.
Institute of Industrial Engineers
 THE ENGINEERING ECONOMIST 71

the customer at the beginning of the loan term and other payments are rhythmic skips with
split constant instead of random skips. This type of loan model may be preferable for bor-
rowers whose ability to make loan payments varies during the year. Such borrowers include
seasonal workers, people who want to go on vacation, and firms with irregular income such
as construction and tourism.

Mathematical models
In this study, we propose new mathematical models with equal series payments and skip pay-
ments with rhythmic skips under the following assumptions. First, a certain number and the
amounts of periodic payments are determined by the customer at the beginning of the loan
term. These payments occur in an equal series and other periodic payments occur as rhythmic
skips. Second, installment intervals consist of equal periodic payments uniformly separated
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in time (period) and skip intervals consist of unpaid periodic payments. Finely, the number
of periodic payments in an installment interval is equal to each other and the length of skip
intervals is equal among themselves.
It can be emphasized that periods determined by the customer and the rhythmic skip
assumptions differentiate our proposed model from previous studies. The notation used in
this study is as follows:

d Level periodic payment amount

P Amount of the loan
N Number of periods in the loan schedule
R Periodic interest rate
f Number of periods in an installment interval, which is an interval of fixed payments
other than those made in u
h Number of missed periods in a skip interval
Mk Payment number of the first payment after the kth skip interval
Lk+1 Payment number of the last payment after the kth skip interval
s Total number of skip intervals
u Number of periods determined by customer in which there will be periodic payments
made in an amount determined by the customer
b Amount of periodic payment made under u as determined by customer

Let d j be a payment amount, then d j is obtained from the payment loan schedule as


b, j = 1, 2, . . . , u
dj = (1)
d, j = Mk , . . . , Lk+1 , k = 0, 1, . . . , s.

In this study, the periodic payment amount d will be determined under the following two
special cases:

Special case 1: When the number of periods determined by the customer is completed, the
installment interval that has equal periodic payments starts.
Special case 2: When the number of periods determined by the customer is completed, the
skip interval that has unpaid periodic payments starts.
 72 A. EROGLU AND H. OZTURK

Figure . Skip payment loan as a combination of equal series payments and a direct reduction loan (Case ).

Model for special case 1

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The payment scheme for the proposed model in this section is depicted in Figure 1. Suppose
that the number of skip intervals in the loan term is k . Because the number of periodic
payments in the installment interval are equal to each other and the length of skip intervals
is equal among themselves, the following equations can be written:
 
Mk = k f + h + u + 1, k = 0, 1, 2, . . . , s. (2)
 
Lk+1 = k f + h + u + f , k = 0, 1, 2, . . . , s. (3)
 
N = Ls+1 = s f + h + u + f , k = 0, 1, 2, . . . , s. (4)

We get the following equation using the time value of money and the payment scheme
depicted in Figure 1:

b b b L1
P= + + . . . + + d (1 + R) j
(1 + R) (1 + R)2 (1 + R)u j=M0
L2 Ls+1 =N
+d (1 + R) j + . . . + d (1 + R) j
j=M1 j=Ms
  s Lk+1
= b (1 + R)1 + (1 + R)2 + . . . + (1 + R)u + d (1 + R) j
k=0 j=Mk
u s k( f +h )+u+ f
=b (1 + R) j + d (1 + R) j
j=1 k=0 j=k ( f +h )+u+1
  s 
(1 + R)u 1
= b(1 + R)1 1 +d (1 + R)k( f +h )u1
(1 + R) 1 k=0

+ . . . + (1 + R)k( f +h )u f

 


1 (1 + R)u s
(1 + R) f
1
=b +d (1 + R)k( f +h )u1 (5)
R k=0
(1 + R)1 1

From Equation (5), we have

  
PR(1 + R)u (1 + R)( f +h ) 1 = b (1 + R)u 1 (1 + R)( f +h ) 1
 
+d 1 (1 + R) f (1 + R)( f +h )(s+1) 1 (6)
 THE ENGINEERING ECONOMIST 73

Figure . Skip payment loan as a combination of equal series payments and a direct reduction loan (Case
).

Solving Equation (6) for d , the periodic payment amount is obtained as

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(1 + R)( f +h ) 1 PR(1 + R)u b (1 + R)u 1
d=   . (7)
1 (1 + R) f (1 + R)( f +h )(s+1) 1

Remark 1. Let b = 0 , then the Equations (6) and (7) reduce to Equations (8) and (9), respec-
tively. Substituting b = 0 into Equations (6) and (7), we have
 
d 1 (1 + R) f (1 + R)( f +h )(s+1) 1
P=  (8)
R(1 + R)u (1 + R)( f +h ) 1


PR(1 + R)u (1 + R)( f +h ) 1
d=  . (9)
1 (1 + R) f (1 + R)( f +h )(s+1) 1

Remark 2. Assume that u = 0 , then the model in which a certain number of periodic pay-
ment amounts is determined by the customer and the other payments are rhythmic skips
reduces to the model in which periodic payments are rhythmic skips. Therefore, the general
formulas of (5) and (7) reduce to Equations (10) and (11), respectively.
 
d 1 (1 + R) f (1 + R)( f +h )(s+1) 1
P=  (10)
R (1 + R)( f +h ) 1


PR (1 + R)( f +h ) 1
d=  . (11)
1 (1 + R) f (1 + R)( f +h )(s+1) 1

Model for special case 2

The payment scheme for the proposed model in this subsection is depicted in Figure 2.
Assume that the number of skip intervals in the loan term is k . Because the number of
periodic payments in the installment interval are equal to each other and the length of skip
 74 A. EROGLU AND H. OZTURK

intervals is equal among themselves, the following equations can be written:

 
Mk = k f + h + u + h + 1, k = 0, 1, 2, . . . , s 1. (12)
 
Lk+1 = k f + h + u + h + f , k = 0, 1, 2, . . . , s 1. (13)
 
N = Ls = s f + h + u. (14)
By using the present value of the loan, which is equal to the net present value of the peri-
odic payments and the payment scheme depicted in Figure 2, we can obtain the following
equation:
L1 s =N
L
b b b j
P= + + . . . + + d (1 + R) + . . . + d (1 + R) j
(1 + R) (1 + R)2 (1 + R)u j=M j=M
0 s1


u
b 
s1 
Lk+1
1
= +d
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j=1
(1 + R) j k=0 j=Mk
(1 + R) j


u s1 k ( f +h
 )+u+h+ f
j
=b (1 + R) +d (1 + R) j
j=1 k=0 j=k ( f +h )+u+h+1

+ R)u 1  s1
1 (1
= b(1 + R) + d (1 + R)k( f +h )uh1
(1 + R)1 1 k=0

k ( f +h )uh f
+ . . . + (1 + R)
 

1 (1 + R)u s1 f
k ( f +h )uh1 (1 + R) 1
=b +d (1 + R) .
R k=0
(1 + R)1 1
    s1
b 1 (1 + R)u d(1 + R)uh 1 (1 + R) f   k
= + (1 + R)( f +h )
R R k=0

 s
    ( f +h )
b 1 (1 + R)u d 1 (1 + R) f (1 + R) 1
= + . (15)
R(1 + R) (1 + R)( f +h ) 1
R u+h

From Equation (15), we have

  
PR(1 + R)u+h (1 + R)( f +h ) 1 = b(1 + R)u+h 1 (1 + R)u (1 + R)( f +h ) 1
 
+d 1 (1 + R) f (1 + R)( f +h )s 1 .
(16)
Solving Equation (16) for d , we get d as follows:
   
(1 + R)h (1 + R)( f +h ) 1 PR(1 + R)u b (1 + R)u 1
d=   . (17)
1 (1 + R) f (1 + R)( f +h )s 1

Remark 3. Let b = 0 , then the model in which a certain number of periodic payment
amounts is determined by the customer and the other payments are rhythmic skips reduces
to the model in which the amount of periodic payment made under u as determined by the
customer equals zero and periodic payments are rhythmic skips. Thus, the general formulas
 THE ENGINEERING ECONOMIST 75

Table . Payment schedule for the model in which a certain number of periodic payment amounts are deter-
mined by the customer and the other payments are rhythmic skips.
Months Periodic payments ($) Balance due ($)

,
, . = ,
, . = ,.
,. . = ,.
,. ,. . . = ,.
,. ,. . ,. = ,.
,. . = ,.
,. ,. . ,. = ,.
,. ,. . ,. = ,.
,. . = ,.
,. ,. . ,. = ,.
,. ,. . ,. =
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of (16) and (17) reduce to the following equations:

  
PR(1 + R)u+h (1 + R)( f +h ) 1 = d 1 (1 + R) f (1 + R)( f +h )s 1 (18)


PR(1 + R)u+h (1 + R)( f +h ) 1
d=  . (19)
1 (1 + R) f (1 + R)( f +h )s 1

Remark 4. Suppose that the number of periods determined by the customer is zero (that
is, u = 0 ), then the model in which a certain number of periodic payment amounts are

Table . Payment schedule for the model in which the amount of periodic payment determined by the
customer equals zero and periodic payments are rhythmic skips.
Months Periodic payments ($) Balance due ($)

,
, . = ,
, . = ,.
,. . = ,.
,. . = ,.
,. ,. . ,. =
,.
,. ,. . ,. =
,.
,. ,. . ,. =
,.
,. . = ,.
,. . = ,.
,. ,. . ,. =
,.
,. ,. . ,. =
,.
,. ,. . ,. =
,.
,. . = ,.
,. . = ,.
,. ,. . ,. =
,.
,. ,. . ,. =
,.
,. ,. . ,. =
 76 A. EROGLU AND H. OZTURK

Table . Payment schedule for the model in which a certain number of periodic payment amounts are deter-
mined by the customer and the other payments are rhythmic skips.
Months Periodic payments ($) Balance due ($)

,
, . = ,
, . = ,.
,. . =
,.
,. . = ,.
,. . = ,.
,. ,. . ,. =
,.
,. ,. . ,. =
,.
,. . = ,.
,. . = ,.
,. ,. . ,. =
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,.
,. ,. . ,. =

determined by the customer and the other payments are rhythmic skips reduces to the model
in which periodic payments are rhythmic skips. Thus, the general formulas of (16) and (17)
change to Equations (20) and (21), respectively.
  
PR(1 + R)h (1 + R)( f +h ) 1 = d 1 (1 + R) f (1 + R)( f +h )s 1 (20)


PR(1 + R)h (1 + R)( f +h ) 1
d=  . (21)
1 (1 + R) f (1 + R)( f +h )s 1

Numerical examples

Example 1
A car with the price value of $9,000 has been purchased with monthly periodic payments. A
loan schedule will be set up with 3 months of periodic payments determined by the customer
as $300 and then 1 month skip after two monthly periodic payments and the loan will be paid
within 11 months. We calculate the remaining monthly periodic payments when the monthly
interest rate is 1%. The problem data are summarized as follows: P = $9, 000, f = 2, h =
1, u = 3, s = 2, b = $300, N = 11, R = 0.01 . Substituting these values into Equation (7),
we get d = $1, 457.33 . The payment schedule is given in Table 1.

Example 2
An automobile has a price tag of $10,000, and it has been purchased with monthly periodic
payments. A loan schedule will be set up with 4 months of periodic payments determined by
the customer and then 2 months skip after three monthly periodic payments and the loan
will be paid within 17 months. We calculate the monthly installments when the monthly
interest rate is 0.9%. The problem inputs are P = $10, 000, f = 3, h = 2, s = 2, u = 4,
 THE ENGINEERING ECONOMIST 77

b = 0, N = 17, R = 0.009 . We get d = $1, 225.34 using Equation (9). The payment sched-
ule is given in Table 2.

Example 3
An automobile has a price tag of $12,000, and it has been purchased with a monthly peri-
odic payment. There will be 3 months of periodic payments determined by the customer as
$250 and 2 months skip before 2 months of periodic payment for a total of 11 months. We
calculate the remaining monthly periodic payments when the monthly interest rate is 1.5%.
The problem data are summarized as follows: P = $12, 000, f = 2, h = 2, s = 2, u = 3,
b = $250, N = 11, R = 0.015 . Substituting these values into Equation (17), we get the pay-
ment amounts in installment intervals as d = $3, 196.66 . The payment schedule is given in
Table 3.
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Conclusion
The problem of periodic payment of a loan is based on the present value of the debt being
equal the net present value of periodic payments. The difference between loan repayment
models is due to the alternation of distribution of periodic payments. The most known and
used payment loan models are the models in which periodic payments are constant, a geomet-
ric alternating and an arithmetic alternating series. Some customers may desire not to make
payments in some periods because of income variability over time. Using this idea, the models
with arbitrary skips were studied by Formato (1992), Moon (1994), Eroglu (2001), and Eroglu
and Karaoz (2002). Increasing the number of payment loan models in order to reach more
customers is important for financial institutions.
In this study, payment loan models in which periodic payments are rhythmic skips have
some specialty (such as either the installment interval or the skip interval occurring as random
after a certain number of periodic payment amounts determined by the customer) instead of
periodic payments with arbitrary skips. General formulae are developed for the models in
which a certain number of periodic payment amounts is determined by the customer at the
beginning of the loan term and the other payments are rhythmic skip with split constant, and
utilization of the models is demonstrated with numerical examples.

Acknowledgments
The authors thank the editor and the anonymous reviewers for their valuable suggestions and helpful
comments on earlier versions of this article.

Notes on contributors
Abdullah Eroglu is a professor in the Department of Business Administration, Suleyman Demirel
University, Turkey. He received his B.S. degree from Cukurova University, Turkey, and M.Sc. and Ph.D
degrees in ndustrial engineering from Gazi University, Turkey.
Harun Ozturk is a research assistant and a D.B.A. student in the Department of Business Admin-
istration, Suleyman Demirel University, Turkey. He received his B.S. degree in mathematics from
Cumhuriyet University, Turkey, and M.B.A. degree in business administration from Suleyman Demirel
University.
 78 A. EROGLU AND H. OZTURK

References
Eroglu, A. (2001) Solutions to problems of skip payment loan with repayment of partial geometric and
arithmetic alternating installments. The Journal of Social Sciences, 5, 297307 (in Turkish).
Eroglu, A. and Karaoz, M. (2002) Generalized formula for the periodic linear gradient series payment
in a skip payment loan with arbitrary skips. The Engineering Economist, 47(1), 7583.
Eroglu, A. and Ozdemir, G. (2012) A loan payment model with rhythmic skips. Paper read at the
Third International Symposium on Sustainable Development, 31 May1 June, Sarajevo, Bosnia
Herzegovina.
Formato, R.A. (1992) Generalized formula for the periodic payment in a skip payment loan with arbi-
trary skips. The Engineering Economist, 37(4), 355359.
Moon, I. (1994) Generalized formula for the periodic geometric gradient series payment in a skip pay-
ment loan with arbitrary skips. The Engineering Economist, 39(2), 177185.
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