**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 Bankrate.com
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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