Unformatted text preview: rincipal. In the case of home
mortgages, these tables are used to find the equal monthly payments necessary to
amortize, or pay off, the mortgage at a specified interest rate over a 15- to 30year period.
Amortizing a loan actually involves creating an annuity out of a present
amount. For example, say you borrow $6,000 at 10 percent and agree to make
equal annual end-of-year payments over 4 years. To find the size of the payments,
the lender determines the amount of a 4-year annuity discounted at 10 percent
that has a present value of $6,000. This process is actually the inverse of finding
the present value of an annuity.
Earlier in the chapter, we found the present value, PVAn, of an n-year annuity by multiplying the annual amount, PMT, by the present value interest factor
for an annuity, PVIFAi,n. This relationship, which was originally expressed as
Equation 4.16, is repeated here as Equation 4.24:
PVAn PMT (PVIFAi,n) (4.24) To find the equal annual payment required to pay off, or amortize, the loan,
PVAn, over a certain number of years at a specified int...
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