LOAN

AMORTIZATIO
N
LOAN AMORTIZATION
- refers to spreading out the repayment of a loan over time.
A fixed chunk of your fixed equated monthly instalment
(EMI) pays off the monthly interest in an amortized loan's
initial repayment stage, and the remaining pay off your
principal amount.

AMORTIZE
- to pay off (an obligation, such as a mortgage) gradually
usually by periodic payments of principal and interest or by
payments to a sinking fund.
COMPOUNDED PERIOD
- the time intervals between when interest is added to the account.
Interest can be compounded Annually, Semi-Annually, Quarterly,
Monthly, Daily or on any basis.

Example:

Consider a loan of $100.000. If the loan is repaid in 24 annual

installment (at the of each year) and the interest rate is 5% per year,
we calculate the amount of the payments by applying the
relationship :
TERM LOAN
FIXED RATE
Interest rate that is set to remain the
same for the term of a loan.
FLOATING-RATE LOAN
*Any type of debt or loan that does not have fixed rate

*requires a recalculation of the loan payment and payment

schedule at each time the loan rate is reset.

*Determined by the open market through supply and

demand.
Suppose that BigRock Corp. seeks a four-year term loan of $100
million. Let’s assume for now that the term loan carries a fixed interest
rate of 8% and that level payments are made monthly.

Suppose in the case of BigRock’s term loan that the rate remains
constant for the first three years, but is reset to 9% in the fourth year.
 BALLOON PAYMENT
-is calculation of the loan amortization can be
modified to suit different principal repayments, such
as additional lump-sum payments.
EXAMPLE:

If there is a $10,000 balloon payment at the end of the

loan in the loan of $100,000 repaid over 24 years, the
calculation of the payment is modified as:
 THE CALCULATION OF INTEREST RATE AND
INTEREST RATE YIELD
-is the percentage charged by a lender for a loan. Interest rate is also used to
describe the amount of regular return an investor can expect from a debt
instrument such as a bond or certificate of deposit (CD).

YIELD
-to the earnings from an investment over a specific period. It includes
investor earnings, such as interest and dividends received by holding
particular investments.
ANNUAL PERCENTAGE RATE versus
EFFECTIVE ANNUAL RATE

ANNUAL PERCENTAGE RATE (APR)

-

-is the product of the stated rate of interest per compound period
and the number of compounding period in a year. Let i be the rate of
interest per period and n be number of compounding periods in a
year , also referred to as the nominal interest rate.
EXAMPLE:

Suppose the Lucky Break Loan Company has simple loan terms:
Repay the amount borrowed, plus 50% in six months. Suppose you
-

borrow $10,000 from Lucky. After six months, must pay back the
$10,000 plus %5,000. The APR on financing with Lucky is the
interest rate per period (50% for six months) multiplied by the
number of compound periods in a year (two six-months periods in a
year). For the Lucky Break financing arrangement:
 EFFECTIVE ANNUAL RATE (EAR)
-is the true economic return for given time period it
takes into account the compounding of interest and
also referred to as the effective rate of interest.

EXAMPLE:

We see that we must pay $12,500 interest on the loan off

$10,000 for one year. Effectively, we are paying 125%
annual interest.
YIELD ON INVESTMENTS
-refers to the earnings generated and realized on an investment
over a particular period of time and also referred to as the internal
rate of return (IRR).

EXAMPLE:
Suppose an investment of $1 million produces no cash flow in the
first year but cash flows of $200,000, $300,00, and $900,000 two,
three, and four years from now, respectively. The IRR for this the
discount rate that solve:
THANK YOU !