loan balances and details of individual payments参考.ppt

Chapter 14 Loan Amortization: Mortgage 14.1 loan balances and details of individual payments Amortization of a loan: the repayment of a loan by periodic payments that, with the possible excepting of the last payment, are equal in size. Blended payments: equal periodic payments combining principal with the interest that has accrued on the outstanding principal since the previous payment. Amortization period: the total length of time to repay a loan with equal regular payments. Size of payment required to reach a particular balance after a specified term Calculating the principal balance There are two methods to determine the principal balance. One is prospective method, the another is retrospective method. Prospective method “Prospective ” means “concerned with or applying to the future.” This method is based on payments still to come. Retrospective method This method is based on payments already made. “retrospective” means “looking back on or dealing with the past.” Reconciliation of the results of the Prospective and Retrospective Method There is normally a small discrepancy between the principal balances obtained from the two methods. In summary, the Retrospective Method always gives the strictly correct balance---it is based on payments actually made. The balance obtained by the Prospective Method is usually in error by a small amount. We will primarily use the retrospective method hereafter for calculating loan balance. Example Foothills Fabricating obtained a $75,000 loan from the Federal Business Development Bank to purchase some machinery. The monthly payments are based on an interest rate of 10.2% compounded monthly and a 10-year amortization period. However, the interest is fixed for only a 5-year term. The payments will then be recalculated so that, at the new market-based interest rate, the balance will be paid off over the remaining 5 years.what will the payments be for the last 5 years if the interest rate becomes 9% co