Principles of Finance · free preview
Loan Amortization
An amortizing loan is repaid with equal periodic payments, each split between interest on the outstanding balance and principal repayment, so early payments are mostly interest, later payments mostly principal, and the balance declines to zero exactly at maturity.
1. The amortization idea
The amortization idea
2. A miniature schedule
A miniature schedule
3. Early years are interest-heavy
Early years are interest-heavy
4. Amortization meets the statements
Amortization meets the statements
5. The payment's two ingredients
Each payment on an amortizing loan is split between which two components?
6. Computing the first year's split
A 1,000 dollar loan at 8 percent carries annual payments of about 388 dollars. In the first year, how much of the payment is interest and how much is principal?
7. The rotating mix
As an amortizing loan matures, what happens to the interest and principal portions of the fixed payment?
8. Why early years build equity slowly
Why does a new thirty-year mortgage build equity slowly during its first years?
9. Prepayment's biggest savings
Why does prepaying a mortgage early in its term save more interest than prepaying late?
10. Where amortization meets the statements
Where do a firm's loan interest and principal payments appear in its financial statements?
11. The balance's gradual extinction
What verb, sharing a root with depreciation, names the gradual repayment of a loan through scheduled payments? Answer in lowercase.
12. The sizing formula
The payment on an amortizing loan equals the principal divided by which annuity-related quantity? Answer with two words.
13. The price of the loan
What one-word term names the sum of all interest charges over a loan's life, the lender's total earnings for renting the money? Answer in lowercase.
14. The remaining amount owed
What two-word term names the unpaid portion of a loan at any point in its schedule? Answer in lowercase.
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