Interest only loans

9D
Learning Intention
› To be able to calculate payments on an interest only loan
by hand and via CAS
Interest only loans
In an interest only loan the borrower only repays the
interest that is charged.
As a result, the payments remain the same over the course
of the loan, and so does the value of the loan itself.
One important thing to remember is that at the end of the
loan the borrower has to pay back the full amount they
borrowed.
Calculating payments by hand
Formula:
An example
David borrows $5000 at a rate of 6% per annum
compounding monthly. If David’s loan is interest only, what
is the value of the monthly payment David will have to
make?
Answer:

David will have to pay $25 each month.

Using CAS
To solve for the payment on your CAS, you put in all the
information you have, but then set the number of payments
to 1 and solve for the payment per period.
Example:
Using the same
example with David
from before:

Remember: Even
though your PV
and FV are the
same, the FV has
to be negative, to
indicate money
owing
QUESTION LIST
Ex. 9D:
Qns 1-3