# Lesson40 - A is given by , where is the annual rate, is the...

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1 MA 15200 Lesson 40, Appendix I, Section 5.6 When an individual borrows money from a bank, he or she signs a promissory note , a contract that promises to repay the money loaned. In a previous lesson, we discussed a formula that could be used to repay a loan in one payment at the end of the term of the loan. This formula was (1 ) , where . kt r S P i i k = + = However, most banks require customers to repay in equal payment installments, rather than one repayment. This process is called amortization. To determine what each payment of a loan would be, the ‘present value of an annuity’ formula is solved for the principal amount (payment amount) R . This gives the following. 1 (1 ) kt Pi R i - = - + Replacing P with A , which represents the amount of the loan, gives the following formula. Installment Payments: The periodic payment required to repay an amount

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Unformatted text preview: A is given by , where is the annual rate, is the frequency 1 (1 ) of compounding, is the periodic rate ( ), and is the term (time) of the loan. kt i R A r k i r i i t k- = - + = Ex 1: Find the amount of an installment payment required to repay a loan of \$15,000 repaid over 12 years, with monthly payments at a 9% annual rate. 2 Ex 2: Hugh is buying a \$18,500 new car and financing it over the next 5 years. He is able to get a 9.3% loan. What will his monthly payments be? Ex 3: One lending institution offers two mortgage plans. Plan A is a 15-year mortgage at 12%. Plan B is a 20-year mortgage at 11%. For each plan, find the monthly payment to repay \$130,000. Ex 4: For each plan above (A and B of problem 3), how much total would all payments equal? How much interest is paid in each plan?...
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## This note was uploaded on 04/23/2011 for the course MA 152 taught by Professor Owendavis during the Spring '08 term at Purdue University-West Lafayette.

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Lesson40 - A is given by , where is the annual rate, is the...

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