Category: Business and Money > Finance
Asked by: jtomsbcglobalnet-ga
List Price: $2.00
13 Aug 2006 14:05 PDT
Expires: 12 Sep 2006 14:05 PDT
Question ID: 755615
Consider a 4-year amortizing loan. If i borrow $1,000 initially, and repay it in four equal annual year-end payments and the interest rate is 8 percent, how can i show that the annual payment is $301.92?
Re: Amoritizing loan
Answered By: gregaw-ga on 15 Aug 2006 07:21 PDT
Below is the formula for figuring this out. http://www.hughchou.org/calc/formula.html "First you must define some variables to make it easier to set up: P = principal, the initial amount of the loan I = the annual interest rate (from 1 to 100 percent) L = length, the length (in years) of the loan, or at least the length over which the loan is amortized. The following assumes a typical conventional loan where the interest is compounded monthly. First I will define two more variables to make the calculations easier: J = monthly interest in decimal form = I / (12 x 100) N = number of months over which loan is amortized = L x 12" You can use this for yearly payments as well. Just use the number of years for "N" and the annual interest rate for "J". M = P * ( J / (1 - (1 + J) ** -N)) M = 1000 * (.08 / (1 - (1 + .08) ** -4)) M = 1000 * (.08 / (1 - (1.08) ** -4)) M = 1000 * (.08 / (1 - .73503)) M = 1000 * (.08 / .26497) M = 1000 * .30192 M = 301.92 If you need any further explanation please let me know by posting a request for clarification. Thanks!
Re: Amoritizing loan
From: cadamy-ga on 13 Aug 2006 14:37 PDT
Can you clarify, please? What do you mean by "How can I show that the annual payment is $301.92?" Do you mean that you know that is definitely the payment? Or is that the payment you're hoping for? Or do you really want to know what the 4 equal payment amounts will be?
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