Chapter 5 Lecture Slides.pdf

Chapter 5 Lecture Slides.pdf - Chapter 5 Repayment of Debts...

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Chapter 5. Repayment of Debts ACTSC 231 — Introductory Financial Mathematics Spring 2019 Chapter 5 1 / 24
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Lecture 19 Amortization of a Debt Textbook Reference: Section 5.1 Learning Objectives Use the amortization method to determine the periodic payment, outstanding balance, and amount of each payment going to interest versus principal for a loan. Chapter 5 2 / 24
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Amortized loan An amortized loan of, say $ L , is repaid by regular payments of interest and principal. e.g. monthly repayments, quarterly repayments, or annual repayments. usually the payments are level. each payment is used first to pay off interest due; the remainder pay off the principal. Often require a smaller balancing final payment (ex. if payment amount rounded up to nearest cent) Table of interest and principal repaid each year is called an amortization schedule Chapter 5 3 / 24
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Example 5.1 A loan of $10,000 is repaid by level installments of $2,000 at the end of each year and a smaller final payment. Assume the annual effective interest rate is 10%. How many payments are there in total? What is the amount of the final payment? a) Answer this question directly (without an amortization schedule) b) Build the amortization schedule with a smaller last payment Chapter 5 4 / 24
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Amortization schedule Time Outstanding Payment Interest Principal Outstanding t Balance at t + 1 at t + 1 at t + 1 balance at t + 1 Chapter 5 5 / 24
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Lecture 20 Debts: Amortization Method Continued Textbook Reference: Section 5.1 - 5.3 Learning Objectives Create amortization schedules and compute quantities from the schedule.
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