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# Loan Amortization

Previous Lesson: Rule of 72

Next Lesson: Bond Discounting

Loan Amortization refers at the process of paying off a debt over time through regular payments. A portion of each payment is for interest while the remaining amount is applied towards the principal balance. Initially, a large portion of each payment is devoted to interest. As the loan matures, larger portions go towards paying down the principal

## Finding Installment Amount

Installment amount consists interest and principal balance. It has nature of constant cash flow (CCF) like the case of annuity. For finding installment amount we have to use present value of annuity equations

## Formula

### Example 1:

The ABC Company is purchased a building and has obtained a Rs. 190,000 mortgage loan for 20 years. The loan bears a compound annual interest rate 16 percent and calls for equal annual installment payments at the end of each year. What is the amount of the annual payment by using general and factor formula?

## Loan Amortization Schedule

Loan amortization schedule consists of five columns

### Example 2:

Suppose you borrow Rs. 22,000 at 12 percent compound annual interest to be repaid over the next 6 years. Equal installment payments are required at the end of each year. What will be installment amount and prepare loan amortization table (rounding to Rupee)?

## References

Financial Management: Theory and Practice, Dr Eugene F Brigham & C Micheal Ehrhardt

Fundamentals of Financial Management: Concise Edition, Brigham Houston

The Economist Guide to Financial Management, John Tennet

Financial Management: Core Concepts, Raymond M Brooks

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