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Bank credit: Revision for final test

Prepared by
Dr. Dao Thi Tuyet Nhung
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Loans and Amortization

Objectives

 To find the regular payments required to amortize a debt

 To find the amount that can be borrowed for a specified payment

 To develop an amortization schedule

 To find the unpaid balance of a loan

 To find the effect of paying an extra amount

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Amortization Formula

 If the debt of $An, with interest at a rate of i per period, is amortized

by n equal periodic payments (each payment being made at the end of
a period), the size of each payment is
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EXAMPLE 1 Payments to Amortize a Debt

 A debt of $1000 with interest at 16%, compounded quarterly, is to be

amortized by 20 quarterly payments (all the same size) over the next
5 years. What will the size of these payments be?
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EXAMPLE 1 Payments to Amortize a Debt

 A debt of $1000 with interest at 16%, compounded quarterly, is to be

amortized by 20 quarterly payments (all the same size) over the next
5 years. What will the size of these payments be?

 Solution

 The amortization of this loan is an ordinary annuity with present

value $1000. Therefore, An = $1000, n = 20, and i = 0.16/4 =0.04.
Thus we have
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Example 2: Buying a Home
 A man buys a house for $200,000. He makes a $50,000 down
payment and agrees to amortize the rest of the debt with monthly
payments over the next 10 years. If the interest on the debt is 12%,
compounded monthly, find

(a) the size of the monthly payments,

(b) the total amount of the payments, and

(c) the total amount of interest paid.

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Example 2: Buying a Home
 A man buys a house for $200,000. He makes a $50,000 down
payment and agrees to amortize the rest of the debt with quarterly
payments over the next 10 years. If the interest on the debt is 12%,
compounded monthly, find (a) the size of the monthly payments, (b)
the total amount of the payments, and (c) the total amount of interest
paid.

 Solution

 (a) We know that An = $200,000 - $50,000 = $150,000, n = 12(10) =

120, and i = 0.12/12 =0.01.

 R=$2,152.06
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Example 2: Buying a Home

(b) The man made 120 payments of $2,152.06, so his payments totaled

(120)(2,152.06) = $258,247.2

plus the $50,000 down payment, or $308,247.2.

(c) Of the $? paid, $200,000 was for payment of the house. The
remaining $? was the total amount of interest paid.

 $308,247.2 - $200,000 = $108,247.2

 $258,247.2 - $150,000= $108,247.2

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Amortization Schedule

We can construct an amortization schedule that summarizes all the

information regarding the amortization of a loan.

 Amortization Schedule

For example, a loan of $10,000 with interest at 10% could be repaid in

5 equal annual payments of size
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Amortization Schedule (cont.)
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Amortization Schedule (cont.)
 Table 6.6 shows the amortization schedule for the first 24 monthly
payments on a $100,000 loan amortized for 30 years at 6%,
compounded monthly.
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Unpaid Balance or Payoff Amount of
a Loan
For a loan of n payments of $R per period at interest rate i per period,
the unpaid balance after k payments have been made is the present
value of an ordinary annuity with n - k payments. That is, with n - k
payments remaining,
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EXAMPLE 4 Unpaid Balance
In Example 2, we found that the quaterly payment for a loan of
$150,000 at 12%, compounded quarterly, for 10 years is $6489.36 (to
the nearest cent). Find the unpaid balance immediately after the 15th
payment.
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EXAMPLE 4 Unpaid Balance
In Example 2, we found that the monthly payment for a loan of
$150,000 at 12%, compounded quarterly, for 10 years is $6489.36 (to
the nearest cent). Find the unpaid balance immediately after the 15th
payment.

Answer:
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EXAMPLE 5 Effect of Paying an
Extra Amount
 Consider the loan in Table 6.6: $100,000 borrowed at 6% compounded
monthly for 30 years, with monthly payments of $599.55. As Table 6.6
shows, the unpaid balance after 24 monthly payments is $97,468.25.
Suppose that from this point the borrower decides to pay $650 per
month.

 (a) How many more payments must be made?

(b) How much would this save over the life of the loan?
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Answer:

 d
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Answer (cont.)

 c
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Example 6: Real estate evaluation

 You are evaluating a house that you want to buy for renting purpose.
You expect that the renting price can be $12,000 at the current year.
We know the inflation rate is around 3.5% and it is quite stable, could
you determine the price of the house, if the appropriate discount rate
is 9%.
+ Example 7: