LO 4.2.1: Calculate the periodic payment (PMT) and amortization amount for a given loan scenario.

Question 1

Amortization

Answer 1

Refers to the repayment of loan principal over time.

Question 2

Amortization schedule

Answer 2

• Refers to how much principal and how much interest is being repaid with each payment
• Structured in such a way that more interest in earlier payments
• Over time; the amount applied to principal increases, and to interest decreases
• See table on p. 145.

Question 3

How is the periodic payment and amortization amount calculated

Answer 3

• Step 1. You tell the calculator about the mortgage and solve for PMT:
• • PV is the amount borrowed
• • N x 12 (mortgages are paid monthly)
• • i/12 (the annual interest rate is compounded monthly)
• • Solve for PMT. [Do not clear the calculator]
• Step 2. You amortize this payment across any number of periods to find out how much has been paid to the PRIN (principal), INT (interest), and the BAL (balance):
• • Example: What is the mortgage balance after 24 months?
• • 1 (for 1st month) > INPUT > 24 (for 24th month) > SHIFT > AMORT (FV key); then toggle through the = key
• ** = PRIN (negative # bc paid out on principal),
• ** = INT (negative # bc paid out on interest),
• ** = BAL (positive # bc this is the balance still owed).