Strategies, Tactics and Maneuvers in Chess

By Cenen Herrera

We often encounter the constructs strategy, tactic and maneuver in business, school, church, and even in our personal world.  How do these concepts influence our goals, our limited resources, our income engine, and our sphere of influence to win in what many will call the game of chess or is it really the game of life? After working for about forty years, i.e., almost non-stop from Asia to North America, I could not imagine how things could have turned differently had I not known how to play the game of chess.  Mother bought the first chess-set in the family when I was six.

In chess, just like in real life, one has to construct a winning mission statement identifying clearly the legacy values one wants to accomplish and pass on to the next generation. Most chess players will aim to win the game in order to advance.  Others would try to win the game or salvage a draw to improve his or her ranking say in a tournament.  Still others would aim to fight a good chess player to gain insights and learn how an expert plays the game.  Whatever purpose one might have in playing chess, the overarching objective appears to be how to win the game.  In other words, once we have defined our mission statement, which normally happens after high-school graduation, i.e., for some it could happen after elementary or middle school graduation or still for some after graduating in college, the next steps would involve strategies, tactics and maneuvers to help us accomplish our mission or goal.

Foresight is the most important strategy in chess.  It means how far in advance could you project your situation given a series of moves that you are about to take.  It is said that a grandmaster could foresee in advance about 20 to 25 moves ahead.  The alternatives could appear to be endless, but adopting sound tactics such as trying to gain a material advantage or sacrificing a piece to gain a positional advantage, could very well spell victory in the long run. The actual maneuvering happens when one actually exchanges with his or her opponent.  Be careful when you actual execute the maneuvering, i.e., material exchanges.  It is in actual maneuvering that sometimes you end up losing the game because after the material exchange, you find yourself down by a piece or down by quality. Some of the best maneuvering tactics in chess could involve the following: (i) try to gain an early positional advantage by focusing your pieces at the center of the board; (ii) avoid having double pawns, (iii) the bishop could be better than a knight in an endgame; (iv) in general, a bishop pair in an endgame is better than a knight pair; and (v) always remember that the best defense is a good offense.

Preparation is the most crucial part of the game, whether it is chess or the game of life.  When I was in my teens, I remember asking why I have to study every day.  When I finished college, I taught it was the end of my studies, yet I saw many people enrolling in higher-education to take up say an MBA, and still others will continue to study after their MBA, and complete their Ph.D., and finally I observed that most professional players embrace Life-Long Learning (Triple L).  Indeed, professionalism is all about discipline, and to achieve the highest level of discipline (one prominent author calls it Level 5 Discipline), one must embrace Triple L.  In a knowledge-based world, professionalism has become synonymous to Triple L.

"An Algorithm for Success"

"Do you have an algorithm for success?"

17 July 2015 - Friday

by Cenen Herrera
Writing from Boston, Massachusetts


In my many years of experience in international finance, I learned three important phases in strategic planning:  (i) Strategy Formulation; (ii) Execution; and (iii) Performance.  For me, the best definition of strategy is resource optimization, which means maximizing the use of our limited resources to reach a desired goal.  Execution is the actual implementation of your strategy, which could either focus on innovation or execution virus.  Innovation according to Peter Drucker is change that creates a new dimension of performance. Execution virus emanates from institutional habits that kill innovation.  The last phase of planning is actual performance, which could be any of the three results:  a. Superior; b. Good Enough or c. Inferior.

The ultimate test of our collegiate level degree is when we are able to pass a Board Exam or a Professional Certification that is universally recognized.  The post-graduate degree reinforces our educational training with a macro-view of our chosen specialty.  Studies had shown that functionality has no correlation to educational attainment.  If you want to achieve success in your specialization, you should adopt a personal algorithm for success. Formulating a strategic winning gambit or developing a personal algorithm for success is imperative if you want to achieve a superior performance. 

CVP is my personal algorithm for success in life.  It means continuously building your Character by engaging in activities that will strengthen your Values, and improve your People management skills. 

      

Stewardship Headroom and the Interplay of TEEL and VCBP

Stewardship Headroom

By Cenen Herrera
Writing from the San Francisco Bay Area, USA

The strategic copula between Trial-and-Error Empirical Learning (TEEL) and Value-Chain Business Planning (VCBP) provides the groundwork for increasing one’s stewardship headroom.  What is stewardship headroom?  I define stewardship headroom as the difference between your existing creative capacity to contribute community-based values and the existing limit of your innovative skills.  As a career professional, I generally find three layers of knowledge maturity, i.e., g-level career or entry level function, m-level career or management function, and c-level career or stewardship function.  Bootstrapping the finance functions, i.e., controllership, treasury, risk management, auditing and information technology, drives the strategic copula between TEEL and VCBP.

The g-level career is mostly characterized by TEEL.  In this entry-level mode, one increases the functional level of knowledge through concrete and hands-on experience.  It is at this level that the skill-set of an employee and its alignment to the job function is held to be of extreme importance.  Reading the office manual is not enough, your research efforts must be grounded on the core principles of how values are created in your organization and the accompanying rationalization of the financial support that goes to each value that is created.  At the g-level, it is extremely important to have a reliable training program aimed at continuously improving the skills of employees.

The m-level group is characterized by people who are able to differentiate risks and potentials and because of TEEL, it is heavily influenced by the science of management.  The m-level starts from the supervisory position to senior management.  At this level, leadership traits such as character, credibility and reputation are considered to be of high importance.  This is the functional group that enables the organization to monitor the day-to-day progress of work and measures the 5 Es of organizational excellence, i.e., ethics, effectiveness, efficiency, economy and the eighty-twenty rule. The performance dashboard typically outlines the difference between the rolling plan and actual performance. Gap analysis is then performed and any deviations from the rolling forecast are then accounted for in terms of pricing, material economics, product mix, business performance, and other factors such as contingent events. 

The science of leadership in turn provides the groundwork for appropriate delegation, accountability and responsibility. The third level of career maturity is popularly known as the c-level group in the organization.  These are people who are not only charged with the management of the organization, but also its stewardship.  It is at the c-level group where the interplay between TEEL and VCBP is expected to play the greatest importance.  As the c-level group matures, it is critical that the stewardship headroom is maximized to continuously generate the benefits that the stakeholders of the organization expect from them.

University of Iowa (UI) Graduation – Henry B. Tippie College of Business, University of Iowa

What does a university graduation mean for a chess player?

By Cenen Herrera

Writing from Iowa City, Iowa
United States of America

18 May 2013, Saturday (17:00 – 18:30)

When a pawn reaches the eighth row in chess, it is usually promoted to an officer level, i.e., the pawn could become any of the chess officials like a horse, bishop, rook or queen. Graduation for a pawn is not easy, but what makes it successful depends on the strategy of the player. Every chess game is an endless struggle to think in advance the moves of your opponent, e.g., probably the next 2 to 25 moves of the opponent, anticipating the best and worst scenarios and executing a game plan that could lead to success. It is extremely difficult to have a complete control of your game, but along the way it is always important to bear in mind that risk is the only thing certain in chess. A good chess player will prepare hard for an endgame that is at least, characterized by a winning position, a material advantage or the possibility of salvaging a draw under the worst scenario.

This is a probable scenario on how a chess player could reflect on the graduation of a child. The chess player will remind the child that a key success factor after graduation in college is the formulation of a winning strategy. Championing hard work, humility, and honesty requires careful planning. The opening years might be full of excitement as the new graduate balances career and social life. It is under this stage, after the first six-month euphoria is over, that serious planning should begin. A well-laid out plan would normally spell-out the Graduate’s career objectives by crafting a vision/mission statement, which is normally prepared during or before college. The sure guide for this plan is to craft an objective where you will find the ultimate happiness: How much equity do you intend to win in your chosen field? Equity here could be defined as either tangible or intangible. Tangible equity might mean the financial assets you have earned and retained, and intangible equity might mean the intellectual/social assets you might have accumulated.

Once the overarching vision/mission statement has been defined, the Graduate should look for the opportunities that could align vision with resources. A value-driven career is the catalytic tool that could transform one’s resources into a robust income engine. Such income engine should be able to sustain one’s professional lifestyle at the same time enabling one to retain a decent amount of savings for the end-game. As one of my former colleagues in the company we were working for in Iowa said: “I only know two types of speed in my career: fast and faster;” To which I countered: “I only know two types of leadership altitude: high or higher.”

The Speaker during the UI graduation rites shared her career journey from a fresh college graduate in marketing at UI way back in the eighties to become a c-level executive in her career in one of the most respected TV stations in America today. She said that to be successful in one’s career, you have to find your happiness, meaning, the work place should be interchangeable with your play place. You should be happy with the people you work with, the clients you work for, and the community you serve. Life is preparing for the end-game which many call graduation from physical to eternal life. She reminded the graduating class to be mindful of their spiritual being. At the end of the speech of the Guest Speaker, I came to realize that graduation is not an end-game, but like in chess, an opening where you could face the familiar and dangerous financial gambits, the classical book openings, and the unorthodox and unexplored moves of a genius who once ruled this game - American chess grandmaster and the eleventh World Chess Champion Bobby James Fischer.

Playing Chess Could Help Business Strategists Perform Better in their Leadership Functions

By Cenen Herrera

Writing from the City of Olds, Iowa
United States of America

Business leaders are under constant pressure from stakeholders to meet their respective interests in the organization and increase the firm’s competitiveness in the market. As a result, corporate leaders continuously strive to sharpen their analytical skills, focus on long-term thinking, improve their strategizing abilities, and look at the “big picture” for assessing risks and potential rewards.

In my long years of playing chess, I learned a number of important lessons which allowed me to perform better in my career.

First, just like in chess where you expect the moves of your opponent, I learned to expect the moves of my boss. When I was a young professional, I practiced the art of expecting the next two to five moves of my boss. As I mature in my career, not only did I learn to think several moves ahead of my boss (up to 25 moves), but I also learned a number of important lessons that helped me increase the accuracy of predicting the requirements of my job as well as winning the excellent ratings from my boss.

Second, I learned that both business and chess rely on exchanges, and successful trades usually end up to one benefitting from the exchange and the other losing in the exchange. Thus, hard work, perseverance, learning from mistakes, and other intellectual and character traits are needed to successfully play chess, and the same is true in business.

Third, I learned that ethical behavior is important in both business and chess. Winning in chess is better if it results from a superior strategy rather than just as a result of a careless move by an opponent. The same is true in business; having a superior strategy creates a win-win situation that ultimately results to the company's positive performance.

Fourth, I find the classic chess gambit as the equivalent of opportunity cost in business. Chess gambits are normally applied to a chess beginner, and while it normally involves gaining a piece or two, the chess beginner normally ends up in an awkward position.

Fifth, I learned that flexibility in chess means the ability to have contingency plans for every move that the player takes. Flexibility refers to the ability to quickly change strategy in light of the development in the markets, i.e., depending on the opportunities and threats. I fully agree with Robert S. Graber of University of Arkansas – Monticello that there are a number of parallels between chess strategy and business strategy.

Strategic Winning Gambits in Financial Stewardship: The Green Ocean & Clear Water Strategies of LJ Roth Reconstruction, Inc.

by Cenen Herrera

Writing from Clear Water City, Pinellas County, Florida, USA

Clearwater Beach is the Best City Beach on the Gulf of Mexico according to Dr. Stephen Leatherman ("Dr. Beach"), a Florida International University professor who has been ranking America's beaches for nine years. USATODAY.com readers ranked Clearwater Beach in their 2001 Top 10 list of Best Beaches from Maine to Hawaii.

Taking a break from a busy schedule in my new found industry: the restoration business of LJ Roth Reconstruction, Inc. (www.ljroth.com), I and my family took a vacation at Sail Port, Tampa, Florida, USA. The place is near Clear water beach where my youngest daughter told me during a mid-afternoon swim that the color of the water was green. I then reflected on the blue ocean business strategy book written by W. Chan Kim and Renée Mauborgne against the background of the restoration industry.

According to WIKIPEDIA, the underlying concept of the book titled “Blue Ocean Strategy” is the metaphor of red and blue oceans, which describes the market universe.

Red Oceans represent all existing industries. This market is a zero-sum-game, meaning, you get an additional share while at the same time your competitor loses the same amount of market share. Under the red ocean strategy, cutthroat competition turns the ocean bloody, i.e., red oceans.

Blue oceans on the other hand involve the creation of a new market opportunity by creating a new market place. A potential market space is explored, which results in rapid growth and enhanced profitability. Thus, where new markets are created, lesser competition is expected. In addition, blue oceans pertain to companies taking care of the environment as their business and making profits along the way.

Green Ocean Strategy is like the Clear Water beach at Florida, USA. It pertains to the strategic winning gambits that we have employed at LJ Roth Reconstruction, Inc. in creating a combination of red ocean and blue ocean strategies. At LJ Roth Reconstruction, Inc., green ocean strategic winning gambits pertain to the simultaneous expansion of its existing markets and the creation of new business opportunities that are unrelated to its existing product lines such as the newly launched marketing focus on duct cleaning services. Green Ocean Strategy is the latest catalyst of innovation at LJ Roth Reconstruction, Inc.

A Paradigm Shift Towards Open-Book-Management

by Cenen Herrera

Writing from Springfield, Missouri - USA

During the first quarter of 2011, I attended a seminar entitled “Great-Game-of-Business" authored by Mr. Jack Stack, President & CEO of Springfield Remanufacturing Corporation (SRC). The seminar was all about common-sense accounting and how transparency played an important role in professionalizing an organization. How much information should shop-floor managers and their workers know about an organization’s performance and the critical numbers that drove such performance were the two important lessons that were taught during the seminar. SRC’s actual turn-around strategy in the early nineties using open-book-management was used as the reference case, and top-executives representing various industries came together to play the great-game-of-business.

I attended the seminar together with top executives from our company and in a scale of 10 where 10 is the highest, I would give the seminar a score of 10 for the following reasons:

1. Open-Book-Management is a strategic winning gambit for companies who believe that employees are the best and real assets of their company;

2. The great-game-of-business is a highly functional game for professional managers to cultivate unlimited business opportunities;

3. The critical numbers that drive performance should be clear to all employees of an organization for all to see the actual causes of any gap between target and actual numbers;

4. Precision marketing is when all employees are committed to the marketing plan and this plan is best carried out through open-book-management; and

5. SRC and its employees have been playing the great-game-of-business for decades, and have shown a large number of organizations and their employees how to play the game to earn regular bonuses that are not found in organizations that do not practice open-book-management.

Starting the New Decade (2011) with a New Corporate Mantra

By Cenen Herrera

Writing from Manhattan, New York, USA

Starting 2011, LJ Roth Reconstruction, Inc (LJR) will have a new corporate mantra: Collaborative Innovation (COIN). LJ Roth Reconstruction, Inc. (a U.S. based company with over 40 years of restoration service) was incorporated in 1976, but was founded by our President - Larry J. Roth in 1971. In line with the company's new corporate vision of "Restoring Quality Living with Speed, Craftsmanship, and Innovation," the new LJR Management Team is starting the new decade by trying to reach all our employees, to have more interactive activities, to keep all our employees fully informed in our rapidly expanding business activities, and of course to enhance the reputation of our company. Leadership at LJ Roth Reconstruction Inc. believes that collaborative innovation could be a strategic winning gambit for its stakeholders.

According to Peter A. Gloor, Research Scientist at the Center for Collective Intelligence at MIT's Sloan School of Management, within a decade, the most successful companies will be those adept at unleashing the power of Collaborative Innovation (COIN) or what we call "swarm creativity." These are companies that give power away, in order to gain power - be it as growth in market share, in revenue, or both. These companies trust the principles of self-organization, ethical behavior and collaborative innovation. At the heart of COIN is the creation of self-motivated teams, a collective vision, and the sharing of ideas, information and work. This is what the newly launched LJR newsletter is all about. It encourages everyone to send articles that are informative, passionately positive and stimulating to the mind. At the end of the day, a company's newsletter is a forum where everybody's voice should be heard, appreciated and encouraged for facilitating continuous learning.

Stewardship Role of the CFO

By Cenen Herrera

Writing from Chicago, USA

In many of the Boardroom discussions I have attended about the financial prospects of the organization, the review of financial performance reports had typically evolved around the complex scenarios prepared by the Chief-Financial-Officer(CFO). These financial scenarios are oftentimes loaded with examples that contain large amounts of asset/liability/equity/income/expense transactions which are sometimes up to six or even nine digits long. Even if these financial reports are rounded to the nearest thousand or million, I find them meaningless if they are not summarized into a "big picture" format. After all, Board discussions are strictly time-bound, and Board expectations are high that only the most significant items that strategically impact on corporate values, financial issues, operational challenges, administrative issues, and regulatory compliance should be discussed.

Scenario planning is an essential tool that CFOs undertake in their normal functions. The scenario planning exercise begins by evaluating the current results of operation using the company's decisive financial indicators. The CFO then coordinates with marketing and operational functions to determine the short and long-term prospects of the organization. Assumptions are then used as inputs for the scenario planning exercise. The important findings of these planning scenarios are then brought by the CFO to the attention of the Board. As the CFO is primarily charged with the management of the company's financial resources, the CFO's responsibility is heavily focused on providing the Board with a dynamic financial framework that could achieve the mission of the organization.

Rolling financial reports, e.g., rolling financial budget, rolling financial forecasts, rolling risk assessments, rolling marketing goals, rolling operational targets, have become the most sought after reports by the Board in its periodic review of the company's performance. To help the Board understand the complexity of these reports, the CFO should find a simple way of explaining the findings of these reports. At the end of the day, the Board heavily relies on the judgment of Management and the CFO's stewardship role in crafting the future direction of the company.

Searching for Cross-Functional Opportunities in Finance: My Mid-West US Experience

By Cenen Herrera

Writing from Mount Pleasant Square, Iowa, USA

I just completed a 3 month project reviewing a sales and consumer use tax audit. There is a cultural metaphor among Finance Consultants that the samples to be selected in an audit should represent the population with a reasonable degree of reliability, i.e., an appropriate margin of error. Cases in sales and consumer use tax audit are readily available in the internet. Most of these cases focus on the sampling methodology that is used during the audit. The main issue is whether the samples selected during the audit represent the population. In addition, when records are inadequate, the question that arises is how sales could be accurately determined to compute the amount of sales tax or consumer use tax due from the entity.

My assignment appeared to be exceptionally boring save for the tension that dramatically transformed a rather lousy linguistic opening into a classic audit gambit. The tense climate was created by the usual hostile auditee-auditor relationship.

Typical reactions I observed during the audit included the following:
Auditee to Auditor: Could you please be more specific in your questions before I waste my time searching for useless reports.
Auditee to Auditor: Time and again, I have told you that the information you are requesting is not available, so please do not bother me next time requesting for non-existing information.

Avoiding a critical recommendation resulting from the audit is the primary reason why some auditees appear to be very sensitive whenever their works are examined by auditors. In such cases, the auditor has to exhibit extreme professional patience (what I call audit gambit no. 1) by outlining the strategic and tactical moves necessary to obtain information, and be prepared to display extreme humility (audit gambit no. 2) by maintaining a positive working attitude despite a hostile environment. In addition, the auditor should maintain a high level of discipline (audit gambit no. 3) by ensuring that audit risk is at a low level, and obtain sufficient appropriate audit evidence (audit gambit no. 4) to support the auditor's overall findings.

Windsor Castle, United Kingdom

A Strategic Winning Gambit in Auditing

By Cenen Herrera

Writing From Chico, CA, USA
10 September 2009

I had a work assignment in the city of Chico, CA from 8 September, Tuesday to 10 September, Thursday, 2009. According to Wikipedia, Chico is the most populous in Butte County, California, United States, the population of which is close to 100,000. Chico is home to both Chico State University and Bidwell Park, one of the country's 25 largest municipal parks and the 13th largest municipally-owned park. Our non-office location was in downtown Chico at the corner of Broadway and Fourth Streets.

Chico is about a three-hour drive from San Francisco, and the view across the counties was typified by a series of barren lands and a number of two-way streets. I could vividly recall that not so long ago, i.e., less than 10 years, I used to travel in similar two-way streets to Sogod, Southern Leyte, Philippines and Bulusan, Sorsogon also in the Philippines. With a background of folk songs on our way to Chico, it made my day-dreaming complete while I quietly sat as a passenger in the front seat of the car we used for the trip. One striking observation I had during this trip to Chico was that while cows roamed around the barren lands, carabaos took their place in the Philippines.

Noted business strategies Philip Kotler and John Caslione, in their book Chaotic, present an argument that the troubled times that challenge business today are not an aberration, but the new face of the normal. In fact, they said that the economic downturn is part of the Age of Turbulence, where both risk and opportunity are quickly felt around the world, now inexorably linked by globalism and technology. Further, both argued that it’s a world that chews up the unprepared, but rewards the prepared – those robust companies or individuals that have the ability to quickly anticipate and effectively respond to potential threats.

Against the background of the chaotic paradigm described in the preceding paragraph, the strategic gambit that allowed us to complete our audit work in Chico was mainly brought about by the following: (i) the leadership experience of my Audit Guru in hastily planning our work assignment, i.e, we barely had an hour to discuss the work assignment; (ii) using technology to the fullest, i.e., making use of existing software available in storing the client’s database and creatively producing analytical frameworks, and (iii) the use of professional audit templates that we have painstakingly developed prior to the engagement.

The lessons learned from our business trip to Chico could be summed up in one sentence: “Speed combined with technical experience and professional outlook, i.e. a combination of professional patience, positive attitude, and willingness to learn and accept change, could spell out the desired outcome in any audit engagement.” The bottom-line is to adopt a strategic winning gambit at the fastest time possible.

Chess and Linguistic Gambits in Finance

By Cenen Herrera

Writing from the City of Williams, CA, USA

Linguistic gambits abound in the business world. They comprise of high-value sacrifices that produce the ultimate good for all stakeholders, i.e., tricky combination and winning lines. In the world of finance, a number of seemingly sophisticated financial planning tools exist and, in my view, they almost always carry a sense of linguistic gambit. For example, scenario planning and stress testing, simulation analysis and shock scenarios are common terms used in financial planning. These financial tools reveal that they are all based on assumptions about important variables that could have an impact on future results of operations. As such, the approach that an organization could adopt would vary widely in scope and breadth, e.g., use of simulation techniques. In addition, it could explore the use of simple smoothing techniques to multivariate statistics. The bottom-line in financial planning is to be able to adopt the appropriate combination and winning lines for the organization to maximize its stakeholders’ value.

Chess is my favored sport. I love to play chess because it improves my memory, and makes me better prepared to face the future. It is in playing chess that I was introduced to the word gambit. Webster defines gambit as a chess opening in which a player risks one or more pawns or a minor piece to gain a positional advantage. Playing chess makes me experience the rigors of how to plan best for the future, which I find very relevant to financial planning, accounting, and my new found love – auditing.

I find chess an indispensable tool for enhancing my financial planning, accounting and auditing skills.

Member:
DLS71, LSGH75 and DLSU79 NCAA Chess Team - Animo La Salle !!!

Impact of Changes in Interest Rates

By Cenen Herrera

Writing from San Francisco City, USA

A lower interest rate on loans generally leads to a lower periodic amortization, e.g., in an annuity type of payment. The exception of course is when there is a loan default scenario or even a protracted arrears situation, in which case, the amortization schedule could differ. The question that arises is whether there is a simple methodology that could be used to explain the impact of such changes. The discussion below provides an example of periodic amortizations used in an annuity type of loan repayments.

Spreadsheet programs easily construct an annuity table to derive the periodic amortization. However, a manual approach is offered to help understand this amortization process. I would use the following assumptions:
Assume a $1,000 loan principal with an interest rate of 5% per year. Assume further that the loan has a maturity of 5 years.

Step 1: Calculate for the year equal payments applicable for principal and interest for every $1
Get the discount factor of $1 after 5 years, i.e., manual way is to divide $1 by 1.05 in year 1 and then divide the result by another 1.05 yearly until year 5. Thus, for example, in year 1, you will get $0.95238, i.e., 1/1.05. In year 2 you will get $0.90703, i.e., 0.95238/1.05, and so on until you reach year 5 where you will get $0.78353, i.e., 0.822702/1.05 for that year. You then get the sum of all the discount factors from year 1 to year 5 which would amount to $4.3295.

Step 2: Divide 1 by $4.3295, i.e. the sum you get in step 1. This will give you $0.23097, which means the yearly amortization, i.e., total of principal and interest, for every $1 amount of original principal, i.e., with an interest rate of 5% per year. Since our original principal amount in the example is $1,000, multiply 1,000 by $0.23097 which results into $230.97 yearly amortization, i.e. principal and interest.

Step 3: Since we now know that the yearly amortization is $230.97, we now would want to get the composition of year 1 amortization, i.e., principal and interest. This is done by simply multiplying .05, i.e. the interest rate for year 1 by $1,000, i.e., loan principal amount to get $50 for interest and the remainder of $180.97, i.e., $230.97 minus $50, would therefore be applicable to the principal amortization.

Step 4: The remaining principal amount of loan for year 2 would be $819.03, i.e., $1,000 minus $180.97. Applying the same procedure in Step 3, you would then get an interest payment of $40.95, i.e., $810.03 multiplied by .05. Thus, $190.02, i.e., $230.97 minus $40.95, would be the principal repayment applicable for year 2. Repeat this procedure until you reach year 5.

Step 5: Now that you know the composition of the principal and interest payments for a given year amortization, you could then calculate total principal and interest payments for all the years. The results would lead to the following: Total Amortization for year 1 to year 5 equals $1,154.87 which is broken down as follows – principal $1,000 and interest $154.87.