Lecture 7

# Lecture 7 - 5 Interest-Only Loan Example • Consider a...

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FIN 311 Instructor: Syed Walid Reza Lecture 7 Spring 2016

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Today Chapter 6 From previous lecture Growing perpetuity Growing annuity Effective interest rate Loan Types and Amortization 2
Annuity, Annuity Due…. We calculated the or using formula We can do the same for Annuities and Annuity Dues 3

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Pure Discount Loans Borrower receives money today, and pays off this loan with interest at some time in the future Examples are T-bills, discount bonds, etc. 4
Pure Discount Loans If a T-bill promises to repay \$10,000 in 12 months and the market interest rate is 7 percent, how much will the bill sell for in the market?

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Unformatted text preview: 5 Interest-Only Loan Example • Consider a 5-year, interest-only loan with a 7% interest rate. The principal amount is \$10,000. Interest is paid annually. What would the stream of cash Fows be? 6 Amortization • Reduce the principal amount my making regular payments • Consider a \$50,000, 10 year loan at 8% interest. The loan agreement requires the frm pay equal monthly payments that include principal and interest. What is the payment amount? • What amount should the frm pay iF it decides to pay o± the loan aFter 3 years? 7 Challenge!! • Questions & Problems: 57 8...
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