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Unformatted text preview: 07/08 Semester II THE UNIVERSITY OF HONG KONG DEPARTMENT OF STATISTICS AND ACTUARIAL SCIENCE STAT1802 Financial Mathematics Tutorial 6 Mar 14, 2008 1 Review: Two methods of repaying a loan 1.1 Amortization method 1. Outstanding loan balance (OB) – prospective method & retrospective method 2. Amortization Schedules (AS): payment at the end of each period = interest paid in this period + principal repaid in this period. 1.2 Sinking Funds The amount of each period payment = the interest paid on the loan to the leader + the sinking fund deposit. The OB at any point is the original principal of the loan minus the accumulated value of the sinking fund, i.e., OB k = L- Ds k | j . 1 2 Exercise 1. A loan of $1000 is being repaid in ten years by semi-annual installments of $50, plus interest on the unpaid balance at 4% per annum compounded semi-annually. The install- ments and interest payments are reinvested at 5% per annum compounded semi-annually....
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- Spring '08