TVM

CFA Level I
#1

Does anyone knows any tricks to solve this problem on calculator, i solved it as an ammortising problem Marc Schmitz borrows $20,000 to be paid back in four equal annual payments at an interest rate of 8%. The interest amount in the second year’s payment would be: A) $1116.90. B) $1244.90. C) $1600.00. D) $6038.40. Payment Interest year 1 20000 6038.42 1600 4438.42 15561.58 year 2 15561.58 6038.42 1244.9264 4793.4936 10768.0864 thanks in advance

#2

amortization is the only way to solve this problem … I dont have calculator with me right now … but annuity cant solve it …

#3

this is how it is solved using calculator With PV = 20,000, N = 4, I/Y = 8, computed Pmt = 6,038.42. Interest (Yr1) = 20,000(0.08) = 1600. Interest (Yr2) = (20,000 - (6038.42 - 1600))(0.08) = 1244.93— step 3 but what i dont understand is step -3

#4

you better make an amortization schedule to understand it better Here is the template Year ---- payment------ Interest---- Principal ----- Balance 1 --------6038.42--------1600-------4438.42-----15561.58 2 --------6038.42--------1244.93----4793.49----10768.09 Interest is calculated on outstanding balance, In the table above I have separated the payment into interest and capital. In year the outstanding loan balance was 15561.58 (20000 - (6038.42-1600) or simply minus the principal paid from the outstanding balance and apply the interest rate i.e 20000-4438.42=15561.58. Interest in year 2 = 15561.58*.08=1244.93

#5

hi, i got that far on ammortising the loan , but was wondering if calulator could help , but i think this is the only way . thank u

#6

once you have calculated your PMT This is using TI BA II Plus calculator. I/Y=8, N=4, PV=-20000 CPT PMT=6038.42 2nd Amort P1=2, P2=2 BAL=10786.09 PRN=4793.49 INT=1244.93 … ANS CP

#7

so still have to make the table

#8

PV=20000, I=8, N=4, CPT PMT = 6038 (20000-(6038-1600))*.08=1244.9

#9

You don’t need a table. Do what cpk123 says (and RTFM regarding the AMORT function).

#10

Here’s a way to do it without using the amortization function. Use these two concepts: 1) that the outstanding balance is always the PV of the remaining payments. 2) For an annual payment loan, the interest in a given year is the beginning balance times the interest rate. So, here we go (note: Using (1): - First, calculate the payment: 20,000=PV; 4=N; 8=I; CPT PMT=??=6,038.42. - Next, WITHOUT CLEARING YOUR CAlULATOR, 3=N; CPT PV=??=15,561.58 This is the balance at the beginning of year (2) - since the loan has THREE payments remaining at that point. Note: by not clearing the memory, the calculator retais all the inputs from the previous calculation. using (2): Since the balance at the beginning of year 2 is $15,561.58, the interest paid in year 2 is $15,561.58 X 0.08 = $1,244.93

#11

busprof…i liked your way…for me it’s less prone to error…!!..Thanks

#12

Bee Wrote: ------------------------------------------------------- > busprof…i liked your way…for me it’s less > prone to error…!!..Thanks Bee: As an aside, you can also use (1) to find principal repayment between any two arbitrary points - simply calculate PV of remaining payments (i.e. change “N” to reflect remaining maturity). The principal repayment is the difference in PVs (and BTW) the interest paid is the difference between total payments during the time in question and the amount of principal repaid).