Time Value of Money

Zoom Session-6
 Objectives:
01 Loan Amortization

02 Uneven Cash flows

03 Effective and Nominal percentage rate

Reference:

Chapter 5 of Brigham, E.F. and Houston, J.F., 2015.

13th Edition. Fundamentals of financial management.
Cengage
 Loan Amortization
Q) What are the annual payments for a 4-year Rs.4,000 loan if the
interest rate is 9% per year? How much the total amount of interest will
be paid against the loan? Make an amortization schedule.
Data:
PV = Rs.4,000
r = 9%
n = 4 years
PMT = ?
Calculation of PMT and Interest Payment

 For PMT (using formula):

PMT = Rs.1,235
Calculation of PMT and Interest Payment
Each Payment (PMT) against the Loan consists on the
following two components;
PMT = Principal Payment + Interest Payment
 Principal Payment:

Each payment (PMT) reduces the principal loan balance.

 Interest Payment:

The income of bank against loan payment.

Calculation of PMT and Interest Payment
For Interest Payment:
Total Interest = Total Payment – Loan Payment
For Total Payment:
= PMT x no. of years
= Rs.1,235 x 4 = Rs.4,940
Total Interest = Rs.4,940 – Rs.4,000
= Rs.940
 Amortization Schedule
Year Pmt Interest Principal Loan Balance

0 minus
9% of loan balance 4,000.00
1 1,235 360.00 874.67 3,125.33
2 1,235 281.28 953.40 2171.93
3 1,235 195.47 1,039.20 1,132.73
4 1,235 101.95 1,132.73 -
Thank you!