Transcription of Chapter 05 - Amortization and Sinking Funds
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Chapter 05 - Amortization and Sinking Funds
Chapter 05 - Amortization and Sinking FundsSection - AmortizationAmortization Method - The borrower repays the lender by means ofinstallment payments at regularly spaced time points. The presentvalue of the installment payments equals theLoan PrincipalL=(Payment Amount) an|iExample:$1000 is borrowed with repayment by means of annual payments ofxat the end of each of 5 years. The loan has an effective annualinterest rate of 8%. What is the payment amount?- - - - - - - - - - - -5-1 TimePayment012345xPresent value:1000=xa5|.08producesx=1000a5|.08=1 000(.08)1 ( ) 5= $ the amount of each - Outstanding Loan BalanceIn the Amortization method part of each payment pays interest onthe loan and part of each payment repays some of the principal ofthe loan (the total amount borrowed).
Payment Payment Interest Deposit in Sinking Fund Index Amount Paid Sinking Fund Balance 0 0.00 1 325.23 100.00 225.23 225.23 2 325.23 100.00 225.23 466.23 3 325.23 100.00 225.23 724.10 4 325.23 100.00 225.23 1,000.02 Total 1,300.92 400.00 900.92 If this same payment $325.23 was used in the amortization method, it would correspond to a 4ji0 = a ...
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