Chapter II

Repayment of bank loans

 Amortization of loans
• The amortization of a bank loan is the portion
of capital which is repaid at each scheduled
payment (eg monthly).
• This payment is made at the same time as the
interest due for the same period.
• The total repayment (amortization and
interest) can be a quarterly, monthly or
annual payment (annuity).
 The annuity
• The borrower pays the lender an annuity that
includes:
- Interest calculated on the basis of the
outstanding balance of loan principal (not yet
repaid capital)
- Amortization i.e. the repayment of part of the
capital borrowed
Annuity = Amortization + Interest
• The loan repayment can be performed in two
different ways:
- at the end of the loan period (bullet loan).
- periodic repayment during the loan period
 Repayment at the end of the loan
period
• April 10, 2003 : A company has contracted a bank
loan in the amount of € 20,000 repayable with a
bullet repayment after 5 years. Interest rate: 5%
- What was the date of repayment ?
- Calculate the amount of interest paid on this
loan.
Interest = 𝐶 × 𝑟 × 𝑛
with C: Capital borrowed
r: Interest rate
n: Loan Period
 Periodic repayment during the loan
period
• 2 possibilities of periodic payment
- By constant amortization
- By constant annuity.
 Repayment by constant amortization
• Look to the previous illustration
- What is annual amortization ?
- What is the amount of interest payable at the
end of each period?
 Repayment by constant annuity
• We use the following formula:

𝒓
Annuity = 𝑪 ×
𝟏−(𝟏+𝒓)−𝒏

And we establish the amortizaton schedule.