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ammotization of loan.

- The Mortgage Lending Process
- Wisconsin Credit Union League - The Holistic Approach to Getting the Word Out: The Wisconsin Story
- The Loan Agreement[1]
- Osal Bulletin Dt 16.09.13
- chan vs ca
- Introduction of the in Duplum Rule in Kenya
- 05FM_SM_Ch5_1LP
- Loan Agreement Individual
- banking Project
- Application Form
- Home Loas Report
- Amortization SHBL
- BKPloanapplication
- SLS+LAW336+WF+Presentation
- Maha Super Housing Loan
- 2013 Income Tax.docx
- ShabeerSA.pdf
- Bank, Non-Bank,Foreign Loans
- Property Statement (2)
- bank profile.doc

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of Loans

3

McGraw-Hill Ryerson

14 - 1

Chapter

14 of

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 2

Calculate

Learning Objectives

the principal balance after any payment

using both the Prospective Method

and the Retrospective Method

After completing this chapter, you will be able to:

the principal and interest components of

any payment

And

the final loan payment when it differs

from the others

LO 1.

LO 2.

LO 3.

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 3

Learning Objectives

Calculate

LO 4.

LO 5.

mortgage loan balances and

amortization periods to reflect

prepayments of principal

mortgage payments for the initial loan

and its renewals

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 4

A $20,000 mortgage loan at 9% compounded

monthly requires monthly payments during its

20-year amortization period.

(1) Calculate the monthly payment.

(2) Using the monthly payment from part (1),

calculate the PV of all payments.

(3) Why does the answer in (2) differ from $20,000?

240

9

0

20 000

PMT = -179.95

12

n =12* 20 = 240 PV = $20000 FV = 0

1.

2. & 3.

LO 1.

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 5

(2) Using the monthly payment from part (1),

calculate the PV of all payments.

(3) Why does the answer in (2) differ

from $20,000?

2.

3.

179.95

179.95

n =12*20 = 240 PV = ? FV = 0 PMT = 179.95

PV = 20,000.5345

The difference of $0.5345 is due to rounding the

monthly payment to the nearest cent!

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 6

Calculate the exact balance after 5 years

assuming the final payment will be adjusted for

the effect of rounding the regular payment.

A $20,000 mortgage loan at 9% compounded

monthly requires monthly payments during its

20-year amortization period.

Calculate the exact n for monthly payments of

$179.95 to repay a $20,000 loan...

20 000

N = 239.982

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 7

Calculate the exact balance after 5 years

assuming the final payment will be adjusted for

the effect of rounding the regular payment.

A $20,000 mortgage loan at 9% compounded

monthly requires monthly payments during its

20-year amortization period.

After 5 years, 239.982 60 = 179.982 payments remain.

Therefore, balance (after 5 years)

= PV of 179.982 payments of $179.95

60

N = 239.982 N = 179.9821 P/V = 17,741.05

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 8

An Original Loan =

Consider that

The PV of ALL of the Payments

(discounted at the contractual

rate of interest on the loan)

Also, that

A Balance = The PV of the remaining Payments

(discounted at the contractual

rate of interest on the loan)

Then

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 9

this can be expressed as the Statement of Economic Equivalence

(Original Loan)

Focal Date

PV of first x

Payments

PV of the

Balance just

after the xth

Payment

For a focal date of the original date of the loan,

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 10

of the xth payment,

the Statement of Economic Equivalence becomes

Retrospective Method for Loan Balances

Retrospective

Retrospective

Suppose we locate the Focal Date

Balance

This is now rearranged to isolate the Balance

Balance

FV of the

Original Loan

FV of the

Payments

already made

FV of the

Original Loan

FV of the

Payments

already made

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 11

Retrospective Method for Loan Balances

Retrospective

Retrospective

is based on PAYMENTS ALREADY MADE!`

Prospective Method for Loan Balances

is based on PAYMENTS YET to be MADE!`

Application

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 12

Calculate the exact balance after 5 years.

A $20,000 mortgage loan at 9% compounded

monthly requires monthly payments of $179.95

during its 20-year amortization period.

Solve using

Retrospective Method

Prospective Method

Then compare

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 13

Retrospective Method for Loan Balances

Calculate the exact balance after 5 years.

A $20,000 mortgage loan at 9% compounded

monthly requires monthly payments of $179.95

during its 20-year amortization period.

Balance = FV of $20,000 FV of first 60 payments

60 179.95

12

9

20,000

12 * 5 Years

FV= 17,741.05

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 14

Prospective Method for Loan Balances

Calculate the exact balance after 5 years.

A $20,000 mortgage loan at 9% compounded

monthly requires monthly payments of $179.95

during its 20-year amortization period.

12* 20 Years = 240 Total payments =

180 179.95

12

9

PV= 17,741.88

0

- 60 made = 180 remaining

Balance = PV of remaining 180 payments

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 15

Difference ($0.83) is because the Prospective Method

assumes that the final payment is the same as all the others.

The Retrospective Method is based on payments

already made.

FV= 17,741.05

Retrospective Method

for Loan Balances

PV= 17,741.88

Prospective Method for

Loan Balances

Comparison of Methods

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 16

Final Payment = (1+i) * (Balance after 2

nd

to last payment)

Balance after 239 payments =

FV of $20,000 after 239 months FV of 239 payments

239

179.95

12

9

FV= - 175.42

20,000

Final Payment = (1+0.09/12) * 175.42

= $176.74

Calculate the size of the final payment.

A $20,000 mortgage loan at 9% compounded

monthly requires monthly payments of $179.95

during its 20-year amortization period.

LO 2.

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 17

Meditech Laboratories borrowed $28,000 at

10%, compounded quarterly,

to purchase new testing equipment.

Payments of $1,500 are made every 3 months.

A. Calculate the balance after the 10th payment.

B. Calculate the final payment.

Balance after 10 payments =

FV of $28,000 after 10 quarters FV of 10 payments

10 1500

4

10

FV= - 19,037.29

28,000

A.

B.

2. 1. 3.

Needed

Balance after

10 payments

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 18

Meditech Laboratories borrowed $28,000 at

10%, compounded quarterly,

to purchase new testing equipment.

Payments of $1,500 are made every 3 months.

A. Calculate the balance after the 10th payment.

the number of payments 1. Calculate

0

N = 25.457 FV = -673.79

25

the balance after the 2

nd

to last payment

2.

Calculate

3.

B. Calculate the final payment.

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 19

the final payment 3. Calculate

Meditech Laboratories borrowed $28,000 at

10%, compounded quarterly,

to purchase new testing equipment.

Payments of $1,500 are made every 3 months.

A. Calculate the balance after the 10th payment.

B. Calculate the final payment.

Final Payment = (1+0.10/4) * 673.79

= $690.63

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 20

A $9,500 personal loan at 10.5%

compounded monthly is to be

repaid over a 4-year term by

equal monthly payments.

A. Calculate the interest and principal

components of the 29th payment.

B. How much interest will be paid in

the second year of the loan?

LO 3.

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 21

A $9,500 personal loan at 10.5% compounded

monthly is to be repaid over a 4-year term

by equal monthly payments.

A. Calculate the interest and principal components

of the 29th payment. B. How much interest will

be paid in the second year of the loan?

First: find the size of the monthly payment

PV = n = i =

9500

12(4) = 48 .105/12

48

12

10.5

PMT = - 243.23

9500 0

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 22

A $9,500 personal loan at 10.5% compounded

monthly is to be repaid over a 4-year term

by equal monthly payments.

A. Calculate the interest and principal components

of the 29th payment.

A.

First: find the balance after the 28 payments

28

PMT = - 243.23

243.23

FV = -4445.06

Interest Component of Payment 29

= 0.105/12* 4445.06

= $38.89

= i * Balance after 28th payment

Principal Component = PMT Interest Component

= $243.23 - $38.89

= $204.34

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 23

A $9,500 personal loan at 10.5% compounded

monthly is to be repaid over a 4-year term

by equal monthly payments.

B. How much interest will be paid in the

second year of the loan?

First: find the balance after 1 Year, and the balance after 2 Years

12

FV = -7483.53

Total Principal paid in year 2 = $7,483.53 - $5,244.84

= $2,238.69

24

FV = -5244.84

Total Interest paid in year 2 = 12($243.23) - $2,238.69

= $680.07

Balance

after 1 year

Balance

after 2 years

B.

Amortization

of Loans

3

McGraw-Hill Ryerson

14 - 24

This completes Chapter 14

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