Math

Chapter

14

Loan Amortization

Copyright © 2014 by The McGraw-Hill Companies,

Inc. All rights reserved.

PowerPoint Presentation Prepared by

“Laurel Donaldson, Douglas College”

LEARNING OBJECTIVES

LO1: Construct a loan’s amortization schedule

LO2: Calculate the principal balance after any payment

using Retrospective Method

LO3: Calculate the final loan payment when it differs from

the others

LO4: Construct a loan’s amortization schedule

LO5: Calculate the principal and interest components of any

payment

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Loan Amortization: Terminology

TERM LOAN

• Periodic payment and interest rate

are FIXED for duration of loan.

AMORTIZATION PERIOD

• Long time periods of 10 – 25 years.

AMORTIZATION SCHEDULE

• Table showing the

interest and principal components of each payment.

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LO1

Loan Amortization: PMT and PV

A $20,000 mortgage loan at 9% compounded

monthly requires monthly payments during its

20-year amortization period.

(1) Calculate the monthly payment.

(2) Using the monthly payment from part (1),

calculate the PV of all payments.

(3) Why does the answer in (2) differ from

$20,000?

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LO1

Loan Amortization: PMT and PV

Step 1 Calculate the monthly payment.

PV = $20000

N

FV = 0

P/Y

12x 20 = 240

9

12

C/Y

12

PV

20000

I/Y

PMT

?

FV

0

PMT =

5

n = 12* 20 = 240

-179.95

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LO1

Loan Amortization: PMT and PV

Step 2

Using PMT = 179.95, Calculate PV

N

P/Y

12x 20 = 240

9

12

C/Y

12

PV

?

I/Y

PMT

FV

-179.95

0

PV= 20,000.5345

The difference of $0.5345 is due to ROUNDING the monthly payment

to the nearest cent!

Typically, the final payment is changed to adjust for the rounding.

But real payments are rounded so ALWAYS

re-enter PMT with 2 decimals.

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