Fundamentals of Financial Instruments. Sunil K. Parameswaran

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Fundamentals of Financial Instruments - Sunil K. Parameswaran


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2 4,350.37 1,811.97 2,538.40 20,111.23 3 4,350.37 1,608.90 2,741.47 17,369.76 4 4,350.37 1,389.58 2,960.79 14,408.97 5 4,350.37 1,152.72 3,197.65 11,211.32 6 4,350.37 896.91 3,453.46 7,757.86 7 4,350.37 620.63 3,729.74 4,028.12 8 4,350.37 322.25 4,028.12 0.00

      Thus, in the case of such loans, the initial installments will consist largely of interest payments. As we approach the maturity of the loan, however, the corresponding installments will consist largely of principal repayments.

      Julie Tate has taken a loan of $25,000 from First National Bank. The loan requires her to pay in eight equal annual installments along with a terminal payment of $5,000. This terminal payment that has to be made over and above the scheduled installment in year eight is termed as a balloon payment. The interest rate is 8% per annum on the outstanding principal. The annual installment may be calculated as follows.

StartLayout 1st Row 25 comma 000 equals StartFraction upper A Over 0.08 EndFraction times left-bracket 1 minus StartFraction 1 Over left-parenthesis 1.08 right-parenthesis Superscript 8 Baseline EndFraction right-bracket plus StartFraction 5 comma 000 Over left-parenthesis 1.08 right-parenthesis Superscript 8 Baseline EndFraction 2nd Row right double arrow upper A equals dollar-sign 3 comma 880.2950 EndLayout
Year Payment Interest Principal Repayment Outstanding Principal
0 25,000
1 3,880.2950 2,000.00 1,880.30 23,119.70
2 3,880.2950 1,849.58 2,030.72 21,088.99
3 3,880.2950 1,687.12 2,193.18 18,895.81
4 3,880.2950 1,511.66 2,368.63 16,527.18
5 3,880.2950 1,322.17 2,558.12 13,969.06
6 3,880.2950 1,117.52 2,762.77 11,206.29
7 3,880.2950 896.50 2,983.79 8,222.50
8 8,880.2950 657.80 8,222.50 0.00

Year Payment Interest Principal Repayment Outstanding Principal
0 25,000
1 5,125 2,000 3,125 21,875
2 4,875 1,750 3.125 18,750
3 4,625
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