Interest if a t bill promises to repay 10000 in 12 if

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Unformatted text preview: est rate. The principal amount is $10,000. Interest is paid annually. Interest What would the stream of cash flows be? • Years 1 – 4: Interest payments of .07(10,000) = 700 • Year 5: Interest + principal = 10,700 This cash flow stream is similar to the cash This flows on corporate bonds and we will talk about them in greater detail later. them 54 54 Amortized Loan with Fixed Principal Amortized Payment - Example Payment Consider a $50,000, 10 year loan at 8% Consider interest. The loan agreement requires the firm to pay $5,000 in principal each year plus interest for that year. interest Click on the Excel icon to see the amortization Click table table 55 55 Amortized Loan with Fixed Amortized Payment - Example Payment Each payment covers the interest expense plus reduces Each principal principal Consider a 4 year loan with annual payments. The Consider interest rate is 8% and the principal amount is $5,000. interest What is the annual payment? • • • • 4N 8 I/Y 5,000 PV CPT PMT = -1,509.60 Click on the Excel icon to see the amortization table 56 56 Work the Web Example There are web sites available that can easily prepare There amortization tables amortization Click on the web surfer to check out the Click site and work the following example site You have a loan of $25,000 and will repay the loan You over 5 years at 8% interest. over What is your loan payment? What does the amortization schedule look like? 57 57 Quick Quiz – Part VI What is a pure discount loan? What is a good What example of a pure discount loan? example What is an interest-only loan? What is a good What example of an interest-only loan? example What is an amortized loan? What is a good What example of an amortized loan? example 58 58 6 Formulas End of Chapter 59...
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