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Video 9 (Topic 2.3 ): Loan Amortization

Video 9 (Topic 2.3 ): Loan Amortization. FIN 614: Financial Management Larry Schrenk, Instructor. Topics. What is an Amortized Loan? The Amortization Schedule. What is an Amortized Loan?. Features Regular Payments of Principal and Interest The Principal is ‘amortized’

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Video 9 (Topic 2.3 ): Loan Amortization

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  1. Video 9 (Topic 2.3):Loan Amortization FIN 614: Financial Management Larry Schrenk, Instructor

  2. Topics • What is an Amortized Loan? • The Amortization Schedule

  3. What is an Amortized Loan? • Features • Regular Payments of Principal and Interest • The Principal is ‘amortized’ • Constant Payments • Tax Implications for Mortgages • Alternatives • Interest Only Loans • Balloon Payments

  4. Amortization Schedule • Describes • Payments • Opening and Closing Balances • Interest vs. Principle Payments • Payment Decomposition • Payments Constant • Ratio of Interest to Principal Payments Changes. • Beginning of Loan: Primarily Interest Payment • End of Loan: Primarily Principal Payment

  5. Example: Amortization Schedule

  6. Amortization Calculation • Find Interest due on Balance. • Subtract Interest from Payment to get Principle. • Subtract Principle from Balance to get New Balance.

  7. Amortization Example I • You borrowed $1,000 for 3 years at 8% with annual payments. • What is your payment each year? • PV Annuity Problem. • N = 3; I/Y = 8; PV = -1,000; PMT = $388.03; FV = 0

  8. Amortization Example II Year 1 2 3 End Bal. 691.97 359.29 0 Interest 80.00 55.36 28.74 Principal 308.03 332.68 359.29 End Bal. 691.97 359.29 0 Begin Bal. 1,000 691.97 • 359.29 Payment 388.03 • 388.03 • 388.03 Interest 80.00 55.36 28.74 Principal 308.03 332.68 359.29 Interest = Rate x Balance 359.29(0.08) = 28.74 691.97(0.08) = 55.36 1,000(0.08) = 80 Principal = Payment – Interest 388.03 – 55.36 = 332.68 388.03 – 28.74 = 359.29 388.03 – 80 = 308.03 Balance = Balance – Principal 691.97 – 332.68 = 359.29 359.29 – 359.29 = 0 1,000 – 308.03 = 691.97

  9. Video 9 (Topic 2.3):Loan Amortization FIN 614: Financial Management Larry Schrenk, Instructor

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