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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). At a point in the repaymentprocess we may need to ascertain the outstanding loan balance -For example,if the loan needs to be refinanced or if the loan is to be purchased byanother lender, it is vital to know how much of the original loancurrently remains outstanding loan balance can be determined in two ways:Prospectively - The outstanding loan balance is the present value oforRetrospectively - The outstanding loan balance is the originalamount of th

Chapter 05 - Amortization and Sinking Funds Section 5.1 - Amortization Amortization Method- The borrower repays the lender by means of installment payments at regularly spaced time points.The present

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