Lec. 6 Simple Debt Amortization Dr.

Samah Abo-EL-Hadid

Simple Debt Amortization

Learning Objectives

The basic definitions required for someone to understand the concept

are:
 Principal - the initial amount of the debt
 Interest Rate Usually expressed as a percentage
 Time - essentially the amount of time that will be taken to
pay down (eliminate) the debt.
 Simple interest calculation follows the formula: I = PRT

Amortized Debt: an amortized debt of amount 𝑃 made at interest rate 𝑅

and to be repaid by 𝑛 payments of amount 𝐴 is based on the equation:
𝑅
𝑃 + 𝑃𝑅𝑇 = 𝐴 × 𝑛 1 + 𝑇−𝑡
2

𝑅
𝑃 1 + 𝑅𝑇 = 𝐴 × 𝑛 1 + 𝑇−𝑡
2

Where
𝑃: the size of debt
𝐴 : The size of each payment.
R : simple interest rate
𝑛 : Number of payments
T : total time.
t : time of each payment.

EXAMPLE (1)
A debt of $4000 is repaid over 1 year by equal monthly payments.
Compute the monthly payment on the basis of an interest rate of 6%
Solution
6 1
𝑃 = 4000, R= , 𝑛= 12, T =1 , t=
100 12
𝑅
𝑃 1 + 𝑅𝑇 = 𝐴 × 𝑛 1 + 𝑇−𝑡
2
6 .06 1
4000 1 + × 1 = 𝐴 × 12 × 1 + 1−
100 2 12
4240 =12.33 𝐴
𝐴 = 343.88

1
Lec. 6 Simple Debt Amortization Dr. Samah Abo-EL-Hadid

EXAMPLE (2)
A debt of $1000 is repaid over 1 year by equal monthly payments.
Compute the monthly payment on the basis of an interest rate of 5%
Solution
5 1
𝑃 = 1000, R= , 𝑛= 12, T =1 , t=
100 12
𝑅
𝑃 1 + 𝑅𝑇 = 𝐴 × 𝑛 1 + 𝑇−𝑡
2
5 .05 1
1000 1 + × 1 = 𝐴 × 12 × 1 + 1−
100 2 12

1050 =12.275 𝐴
𝐴 = 85.54
EXAMPLE (3)
A debt of $5000 is repaid over 1 year by equal monthly payments.
Compute the monthly payment on the basis of an interest rate of 10%
Solution

EXAMPLE (4)
A debt of $20000 is repaid over 8 months by equal monthly payments.
Compute the monthly payment on the basis of an interest rate of 6%
Solution

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Lec. 6 Simple Debt Amortization Dr. Samah Abo-EL-Hadid

EXAMPLE (5)
A debt of $10000 is repaid over 9 months by equal monthly payments.
Compute the monthly payment on the basis of an interest rate of 8%
Solution

EXAMPLE (6)
A debt of $6000 is repaid over 1.5 years by equal monthly payments.
Compute the monthly payment on the basis of an interest rate of 15.4%
Solution

EXAMPLE (7)
A debt of $160000 is repaid over 2 years by equal quarterly payments.
Compute the monthly payment on the basis of an interest rate of 16%
Solution

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Lec. 6 Simple Debt Amortization Dr. Samah Abo-EL-Hadid

EXAMPLE (8)
A debt of $25000 is repaid over 1.5 years by equal monthly payments.
Compute the monthly payment on the basis of an interest rate of 9%
Solution

EXAMPLE (9)
A debt of $10000 is repaid over one year by equal quarterly payments.
Compute the monthly payment on the basis of an interest rate of 8%
Solution

EXAMPLE (10)
A debt of $8000 is repaid over 1.5 year by equal 2 months payments.
Compute the monthly payment on the basis of an interest rate of 12%
Solution

EXAMPLE (11)
A debt of $90000 is repaid over 1.5 year by equal quarterly payments.
Compute the monthly payment on the basis of an interest rate of 12%
Solution