Lecture 5

Lecture 5 - ISE460:Engineering Economy...

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ISE 460: Engineering  Economy University of Southern California Fall 2010 Joseph Chow Week 3: Lecture 5
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The Ongoing Textbook Saga I stopped by the bookstore after the last class – they  apparently had Dr. Bottlik on the system!  So I sent a  note to their senior buyer and she responded that they’ll  have me in the system and have the order here by this  THURSDAY 10/12/10 2
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Review Accounting Basics Interest Rates Today is about loans/funding, and start of  discounted cash flow analysis Debt management Bonds DCF 10/12/10 3
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Last Class Effective Interest Rates Annual Percentage Rates (APR)’s  Now that you know how to get effective  rates, what are some uses for them? 10/12/10 4
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DEBT MANAGEMENT 10/12/10 5
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The Amortized Loan … a loan that is repaid in equal  periodic  amounts You already know how to convert a loan amount  into an equivalent periodic payment (monthly,  annually) given an interest rate and the term of  the loan But how about how much of the loan remains  after n periods?  Or how much of that payment is  for interest only? 10/12/10 6
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At any time period  n , how much  principal left?  How much  interest? Given a principal sum P, and equal payments A =  P(A/P,i,N) Let B n  = remaining balance at end of period  n , with B  = P I n  = the interest payment in period  n , where I n  = B n-1 (in other words, if you have $1000 remaining after 2 nd   period and 5% interest, then I 3  = $50) P  = principal payment in period  n Then: A = P  + I n   10/12/10 7 But A is constant!  So as the  portion of principal paid  increases, the amount of  interest paid decreases!
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One Method: Tabular Compute the interest  progressively on the  remaining balance in  a table format Note that with  amortized loans, the  first payment has  highest interest 10/12/10 8
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Given $20,000 loan 0.5% monthly compounded interest rate 5 year payment plan A = 20000(A/P,0.5%,60) = $386.66 What are B 3  (remaining balance at end of  period 3) and I 3  (amount of interest paid in  period 3)? 10/12/10
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Lecture 5 - ISE460:Engineering Economy...

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