Course Name: BMTH 1003

4, 2015

Date: Nov

Amortization and repayment of debt

Learners (who are they?):

Students of the programs: Honours

Bachelor of Commerce, and BAB
(Financial Services)

Level / Year of program:

First Semester

Topic:

Financial Mathematics I
BMTH1003

Context / Theme:

Amortization and Repayment of debt

Class Outcomes:

Construct and analyze a loan's

amortization schedule by evaluating
the principal balance after any
payment and the principal and
interest components of any payment.
Analyze the consequences of a lump
prepayment or increase in the
payment size.
Evaluate whether or not you should
refinance a loan when there is a
penalty involved.

What will students

already know or have
been taught?

Students have some background in

compound interest and any type of
annuity.

Resources Used:

PowerPoint presentation; Whiteboard,

Markets
Using BOPPPS Model of Teaching

Bridge-in and Pre-test

I will continue the story about my OSAP loan that started last class and ask
the student to answer the following questions. I will encourage discussion

and the use of calculator to answer the questions. At the same time, I will
be checking what the students already know about the topic.
The Story
On November 2009 my OSAP debt was of $6,688.41. This balance should
have been paid with interest of 4.75% compounded monthly by making
payments at the end every month during 90 months. Last class we
computed the size of my payment and obtained that it is $88.48
How much have I paid so far?
How much of this is interest
How much have I paid from the principal
If I made a lump-sum payment of a $1000 on October 31, 2015 what is
the size of the new 18 remaining payments?
If I continue paying $88.48, How long will it take to pay off the
balance?

Learning Objective
At the end of this lesson, you will be able to perform computations
associated with amortization of debts involving annuities, and find the
size or number of the remaining payments when there is a change in
one of the variable involved in the annuity.

Participatory Learning
Using a Power Point Presentation, the students and I will solve the last two
questions of the pre-test. I will encourage participation and will be walking
around the classroom checking their work. Ill be explaining any concept
while solving the problem. After this, we will work together the following
problems. I will use graphs (time lines), calculator and formulas.
A $320,000 mortgage has interest of 4.52% compounded semiannually. The mortgage is to be repaid by equal monthly payments
over 20 years. The mortgage contract permits lump-sum payments at
each anniversary date up to 10% of the original principal
What is the balance at the end of a 4-year term if a lump-sum
payment of $20,000 is made at the end of the second year?
How many more payments will be required after the 4-year term
if there is no change in the interest rate?
What is the difference in the cost of the mortgage if no lump sum
payment is made?

 The Hazes agreed to monthly payments rounded up to the nearest

$100 on a mortgage of $45,000 amortized over 10 years. Interest for
the first 5 years was 7.25% compounded semi-annually. After 25
months, as permitted by the mortgage agreement, the Hazes
increased the rounded monthly payments by 10%.
Determine the mortgage balance at the end of the 5-year term.
If the interest rate remains unchanged over the remaining term,
how many more of the increased payments will amortized the
mortgage balance?
Interest in a $500,000 mortgage is 7.2% compounded semi-annually.
The interest rate is guaranteed for 8 years. The mortgage is to be
repaid by equal monthly payments over the 25 years. After five years,
interest rate have fallen to 5.6% compounded semi-annually and the
mortgage is refinanced. Determine the new monthly payment,
assuming
A penalty equal to three-month interest on the outstanding
balance
The interest rate differential method
(Outstanding balance x IRD x term remaining in payment
periods)

Post-test
To determine if the student have indeed learned I will ask them to work the
following questions.
A mortgage of $240,000 is amortized over 20 years. Interest for the
first 5 years was 7.25% compounded semi-annually. After 4 years of
payment, the interest drops to 4.85% and the mortgage is refinanced.
Compute the new monthly payment, assuming

A penalty equal to three-month interest on the outstanding

balance
The interest rate differential method
Edmonton Pizza buy a property and takes out a $350,000 mortgage.
The mortgage is amortized over 25 years with monthly payments of
9% compounded semi-annually. After 6 years Edmonton Pizza sell the
property and the buyers want to setup a new mortgage better tailored
to their needs. Edmonton Pizza finds out that in addition to repaying
the principal balance on its mortgage, it must pay a penalty equal to
three-month interest on the outstanding balance. What total amount
must Edmonton Pizza repay?

Summary
I will give the following points to the students to summarize the lesson.

An interest-bearing debt is amortized if both Principal and interest are

repaid by a series of equal payments made at equal interval of time
The periodic payments form an annuity
The initial loan principal is the PV of the annuity
The balance at a given time is the FV at that time
Any change in the variables of the annuity produce a new annuity with
a PV given by the balance at the time of the change plus a penalty If
any. N will be the same as the number of the remaining payments