FINC19011 – BUSINESS FINANCE-Wk02-2

During that period how much of payment represents

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Unformatted text preview: n over life of loan • Monthly loan payment is structured so each month portion of principal is paid off; at time loan matures, it is entirely paid off Level cash flows: annuities and perpetuities Preparing a loan amortisation schedule • Amortised loan: each loan payment contains some payment of principal and an interest payment • Loan amortisation schedule is a table showing: – – – – loan balance at beginning and end of each period payment made during that period how much of payment represents interest how much represents repayment of principal Level cash flows: annuities and perpetuities Preparing a loan amortisation schedule • With amortised loan, larger proportion of each month’s payment goes towards interest in early periods – as loan is paid down, greater proportion of each payment is used to pay down principal • Amortisation schedules are best done on a spreadsheet NOTE THE MATH ON LOAN AMORTIZATION ON PAGE 194 (FIG. 6.5) • The effective annual interest Interest rates can be quoted in financial rate markets in variety of ways – Most common quote, especially for a loan, is annual percentage rate (APR) • APR represents simple interest accrued on loan or investment in a single period; annualised over a year by multiplying it by appropriate number of periods in a year The effective annual interest Calculating the effective annual rate (EAR) rate Correct way to calculate annualised rate is to reflect compounding that occurs; involves calculating...
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This document was uploaded on 03/27/2014.

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