What is an amortised loan?
In an amortised loan, the amount borrowed is the present value of all the repayments.
Try the following questions:
Question 1:
You borrow $7 500 to buy a car and agree to repay the loan by way of equal monthly repayments over 5 years. The current interest rate is 12% per annum, compounded monthly. What is the amount of each monthly repayment?
Question 2:
A car loan of $10,000 is to be repaid by equal instalments of principal and interest over 5 years at 10% p.a. compounding annually.
Find:
- The annual instalment i.e the PMT
- The interest and principal portion of the first two payments
- If you win the lottery and repay the loan after the 3rd payment, how much will you need to repay? (need to find the PV of the last two PMTs)
Question 3:
A housing loan of $350,000 is to be repaid by equal instalments of principal and interest over 25 years at 7.8% p.a. compounding monthly.
Find:
- The monthly instalment (PMT)
- The interest and principal portion of the 17th payment