Keith quicksilver funding maintain profitability, banks must take large margins on the money that passes through them. Earning out of the difference in interests is the main source of revenue for any bank, and has been the key element in the functioning of all traditional financial institutions.

1. Amortized Loans
Keith quicksilver funding

2. Introduction
• The word amortize comes from the Latin word
admoritz which means “bring to death”.
• What we are saying is that we want to bring the
debt to death! More gently it is retiring the debt.
• The important factors related to an amortized
loan are the principal, annual interest rate, the
length of the loan and the monthly payment.

3. Charting the history of a loan
• Chart the history of an amortized loan of $1000 for three months at
12% interest, with a monthly payment of $340.
• When the 1st payment is made 1/12 of a year has gone by, so the
interest is $1000 x .12 x 1/12 = $10.
• The payment first goes toward paying the interest, then the rest is
applied to the unpaid balance. The net payment is $340 - $10 =
$330.
• The new balance is $1000 - $330 = $670.
• Now we calculate the interest on the remaining balance.
• $670 x .12 x 1/12 = $6.70.
• The net payment is $340 - $6.70 = $333.30.
• The new balance is $670 - $333.30 = $336.70.
• Once again we calculate the interest on the remaining balance.
• $336.70 x .12 x 1/12 = $3.37.
• Thus the last payment has to cover the interest and the remaining
balance.
• This is $3.37 + $336.70 = $340.07. Thus the last payment is
$340.07

4. A table of the previous example
• Beginning balance $1000
Payment Interest Net
Payment
New
Balance
$340.00 $10.00 $330.00 $670.00
$340.00 $6.70 $333.30 $336.70
$340.07 $3.37 $336.70 $0.00

5. Finding a monthly payment
• Many times we know the length of a loan,
the annual interest rate and the amount of
the loan. Can we afford to make the
monthly payment??? This question is very
important when considering a mortgage.
• The monthly payment formula is basically
derived from the equation future value of
annuity = future value of loan amount.

6. Payment formula
• Let P be present value or full amount of
loan, r is the annual interest rate, t is the
length of the loan and PMT is the monthly
payment.
 
]1)1[(
1
12
12
12
1212


 tr
trr
P
PMT

7. Example
• What is the monthly payment for a loan of
$29,000 for 5 years at an annual interest rate of
5%.
• The monthly payment is $547.27
• Note: If you follow this schedule, you will make
60 payments of $547.27 which in total is
$32836.20. The amount of interest paid to the
lender is $32836.20 - $29000 = $3836.20
 
]1)1[(
129000
)5)(12(
12
05.
)5)(12(
12
05.
12
05.


PMT

8. Example using Table 1
• Amortization tables have been created so that
people don’t need to use the complicated
payment formula.
• For example, find the monthly payment for a
$10000 loan at 10% annual interest for 5 years.
• Looking at Table 1, this corresponds to the entry
of $212.48.
• Verify using the PMT formula. You may be off by
a cent or two, that’s because rounding error was
introduced into the table.

9. Another example using table 1
• What would be the payment on a loan of
$58,000 at 10% annual interest for 30
years?
• $58000 = $50000 + 4 x $2000
• We will use the entries for $50000 at 30
years and $2000 at 30 years.
• The PMT = $438.79 + 4 x $17.56 = $509.03
• Verify using the PMT formula. Rounding
error has been introduced.

10. Example Using Table 2
• Recall that we calculated the monthly payment
of a $29000 loan for 5 years at 5% annual
interest to be $547.27.
• Let’s use table 2.
• The entry that corresponds to 5% for 5 years is
$18.871234.
• Since this is a $1000 table, and the loan amount
is for $29000, we multiply the $18.871234 by 29
to get a monthly payment of $547.265786 or
properly $547.27. The same as we computed
using the formula.