2-1

CHAPTER 1
Time Value of Money
Simple interest
Compound interest
Present and Future value
Annuities
Effective rate
Loan Amortization

2-2






The concept of Time Value
of Money
If you are offered the choice between
having $100 today and having $100 one
year from now, what will you Prefer?
Why?
you will usually prefer to have $100
now.
because you can simply put the money
in the bank and earn interest on it.

2-3
$100 received today is worth more
than $100 received after one year
If the annual interest rate i=10%,
after 1 year you will earn :
interest: 10% x $100 =$10
+ the original amount ($100)
= $110
2-4
the fundamental principle behind the
concept of time value of money is that, a
sum of money received today, is worth
more than if the same is received after a
certain period of time.
Why?
The main reason why the value of money
increases with time is because of the
interest rate, which represents the return
obtainable by investing the money or the
cost of borrowing it.


2-5
Time lines
Show the timing of cash flows.
Tick marks occur at the end of periods, so
Time 0 is today; Time 1 is the end of the
first period (year, month, etc.) or the
beginning of the second period.
CF
0
CF
1
CF
3
CF
2
0 1 2 3
I%
2-6
Drawing time lines
100
100
100
0 1 2 3
I%
3 year $100 (ordinary annuity)



100
0 1 2
I%
$100 lump sum due in 2 years
70 10
0
1
2
3
I%
50
Uneven cash flow stream (Mixed stream) : A series of
unequal cash flows reflecting no particular pattern.


60
2-7
Present Value and Future Value
- Present value: is the value today of a sum of money to be
received at a future point of time.
- Future value: represents the value of a given sum of money
today measured at a specific date
- Compouding: The process of going from todays value (present
value) to future value.
- Discounting: The process we use to calculate the present value
of a future cash flow.

FV
0 1 2 n
i%
PV
Compouding
Discounting
2-8
The Interest Rate:
Simple interest: Interest on only the
original amount, or principal
Compound interest: Interest on the
principal as well as on any previous
interest earned
2-9
A- The Simple interest
In the simple of interest only the
principal earns interest in every period
over the life of the amount. The interest
earned at the end of the period on the
principal will not earn interest in any of
the subsequent periods

2-10
Future Value of an amount
Example 1: Assume that you deposit $100 in an
account earning 10% simple interest for 2 years. What
is the accumulated amount at the end of the 2nd year?
1- At the end of period 1, you will have:
Interest earned = 0.10 x $100 = $ 10
+ Principal $100
Total amount FV
1
= $100 + $10 = $110

100 FV
1
=? FV
2
=?
0 1 2
i=10%
2-11
Under the simple rate of interest in the successive
period only the principal ($100) will earn the
interest.

The interest earned ($10) in period 1 will not earn interest
in any of the subsequent periods.
2- Therefore, the total amount in the account at the end of
the period 2 will be FV
2
= $120, computed as follows:
Interest earned in period 1 = 0.10 x $100 = $ 10
+ Interest earned in period 2 = 0.10 x $100 = $ 10
+ Principal $100
Total amount FV
2
= $100 + $10 + $10 = $120

2-12
Simple interest Formula
Future Value = P + SI
SI = P

(i.n)
FV = P

(1+ i.n)
SI: Simple Interest
P: Deposit today (t=0)
i: Interest Rate per Period
n: Number of Time Periods

2-13
What if the interest rate does not
stay the same over time?
If the simple interest rate is i
1
, for the
first n
1

years, i
2

for the next n
2

years, i
3
for
the next n
3

years, etc.
The principal P will accrue interest Pi
1
n
1

for the first n
1

years, Pi
2
n
2

for the next n
2

years, and Pi
3
n
3

for the next n
3

years, etc.
FV = P(1 + i
1
n
1

+ i
2
n
2

+ i
3
n
3

+ ....)
2-14
Example 2: Suppose you deposit $1.000 in an
account pays simple interest. What will be the
future value of the account if the annual simple
interest rate is 7% for the first 5 years, 10% for
the next 10 years, and 12% for the last 5 years?
P = $1.000, i1

= 7%, n1

= 5
i2

= 10%, n2

= 10
i3= 12%, n3= 5
FV = $1,000(1 + 0,075 + 0,1010 + 0,125)
= $1.000 (2,95) = $2.950
2-15
Present Value of an amount
... 1
3 3 2 2 1 1
+ + + +
=
i n i n i n
F
PV
If there are more than one simple interest rate over
time, (i
1
, for the first n
1

years, i
2

for the next n
2

years,
i
3
for the next n
3

years, etc )

The PV shows the value of cash flows in terms
of todays purchasing power.
The present value (PV) of an amount F received at the
end of n years with a simple rate of interest i, is given by
(

+
=
i n
F
PV
. 1
2-16
The present and future value of
series of payments (Annuity)



In the above time line, the same amount A is made at
the end of each year for n years.

A
A
A
0 1 2 3
i%
We define a sequence of deposits as an annuity
if it satisfies the following two conditions:
1. The deposits are of the same amount
2. The deposits must be made at equidistant
intervals.
Considering the following timeline:



A
A
n-1 n


2-17
The difference between an ordinary
annuity and an annuity due
Ordinary Annuity
A A A
0 1 2 3
i%
A A
0 1 2 3
i%
A
Annuity Due
2-18
Future Value of an Ordinary annuity
The same amount A is made at the end of each year for n years

FV of first A = A [1+(n-1)i]
FV of 2nd A = A [1+(n-2)i]
FV of 3rd A = A [1+(n-3)i]

FV of (n-2)
th
A = A (1+2i)
FV of (n-1)
th
A = A (1+i)
FV of n
th
A = A
Thus the future value of this ordinary annuity (of the end)
FVA
ord
= A [1+(n-1)i] + A [1+(n-2)i] + + A (1+2i) + A (1+i) + A
= A + A + + A + Ai [(n-1)+(n-2)++2+1]


A
A
0 1 2 n-2
i%




A A A
n n-1
(

+ =
2
) 1 (
.
n n
Ai nA
(

+ =
2
) 1 (
1 .
i n
nA FVA
ord
2-19
Future Value of an annuity Due
If the same amount A is made at the beginning of each
year for n years
FV of first A = A [1+n.i]
FV of 2nd A = A [1+(n-1)i]
FV of 3rd A = A [1+(n-2)i]

FV of (n-2)
th
A = A (1+3i)
FV of (n-1)
th
A = A (1+2i)
FV of n
th
A = A (1+i)
Thus the future value of this annuity Due (of the beginning):
FVA
due
= A [1+ni] + A [1+(n-1)i] + A [1+(n-2)i] + + A (1+2i) + A (1+i)
= A + A + + A + Ai [n+(n-1)+(n-2)++2+1]





(

+
+ =
2
) 1 (
.
n n
Ai nA
(

+
+ =
2
) 1 (
1 .
i n
nA FVA
due
A
A
0 1 2 n-2
i%




n-1 n
A
A
A
..
..
2-20
Example 3 :
Suppose an account earns a 15 percent simple rate of interest annually.
What will the future value be of an annual deposit of:
(a) $20 at the end of each year for four years?
(b) $20 at the beginning of each year for four years? (Anuity due)

(a) FVA
ord
= 20(1+0.15x3) + 20(1+ 0.15x2) + 20(1+0.15) + 20 = $98

or = 4x20[1+(3x0.15)/2] = $98

(b) FVA
due
= 20(1+0.15x4)+20(1+0.15x3)+20(1+0.15x2)+20(1+0.15)

or = 4x20[1+(5x0.15)/2] = $110
(

+ =
2
) 1 (
1 .
i n
nA FVA
ord
(

+
+ =
2
) 1 (
1 .
i n
nA FVA
due
2-21
Present Value:

If the same amount A is made at the end of each year
for n years.
PV of first A = A / (1+i)
PV of 2nd A = A / (1+2i)
PV of 3rd A = A / (1+3i)

PV of (n-1)
th
A = A / [1+(n-1)i]
PV of n
th
A = A / (1+ni)

PVA
ord
= A/(1+i) + A/(1+2i)++ A/(1+ni)

If the deposits are made at the beginning of each year

PVA
due
= A + A/(1+i) + A/(1+2i)++ A/[1+(n-1)i]


2-22
Example 4:
The deposit of $8 is made in an account for 20 years.
If the rate of interest is 6%, obtain the present value
of this annuity as well as annuity due:

PVA
ord
= 8/(1+0.06) + 8/[1+(2x0.06)] +
+ 8/[1+20x0.06)]

PVA
due
= 8 + 8/(1+0.06) + 8/ [1+(2x0.06)] +
+ 8/[1+(19x0.06)]
2-23
B- Compound interest
In compound rate of interest, the
interest earned on the principal during
the specified period also earns interest
in the subsequent periods.
2-24
Example 5:
Assume that you deposit $100 in an account earning
10% compound interest for 2 years. What is the
accumulated amount at the end of the 2nd year?
1- At the end of period 1, you will have:
Interest earned = 0.10 x $100 = $ 10
+ Principal $100
Total amount FV
1
= $100 + $10 = $110


100 FV
1
=? FV
2
=?
0 1 2
i=10%
2-25
at the end of period 1, the account will have $110 under
both approaches (simple interest and compound interest).
2- But at the end of period 2, the total amount will be
FV
2
= $121 under the compound interest approach rather
than $120 as we obtained in the simple interest approach.
Break down is as follows:
Principal $100
Interest earned in period 1 = 10% x $100 = $ 10
Interest earned in period 2 = 10% x $100 + 10% x $10
= $ 11
Total amount FV
2
= $100 + $10 + $11 = $121
The difference of $1 between compound interest and simple
interest approach is due to interest of $1 earned in period 2
on $10 interest that was earned in period 1.
2-26
Compound interest Formula
Future Value of a Lump sum:
FV = PV

(1+ i)
n
PV : Deposit today (t=0)
I : Interest Rate per Period
n : Number of Time Periods

FV = PV.(1+i)
n
= PV.(FVIF, i , n)
The values of FVIF (Future Value Interest Factor) are given in
the table (A.1)
2-27
What is the future value (FV) of an initial $100
after 3 years, if the interest rate is 10%?
Finding the FV of a cash flow or series of cash flows
is called compounding.
The time line:




After 3 years:
FV
3
= PV (1 + I)
3
= $100 (1.10)
3
=$133.10
FV
3
= PV (FVIF,10%,3) = 100x1.3310 =$133.10





FV = ?
0 1 2 3
10%
100
2-28
Present Value of an Amount
Finding the PV of a cash flow or series of cash flows
is called discounting (the reverse of compounding).





PV = FV
n
/ (1 + i)
n
PV = FV.(1+i)-
n
= FV.(PVIF, i , n)

The values of PVIF (Present Value Interest Factor)
are given in the table (A.3)

PV = ?
0
1
2
n
i%
FV
2-29
Solving for PV:
The formula method
What is the present value (PV) of $100 due
in 3 years, if interest rate is 10%?




PV = FV
3
/(1 + i)
3
= $100/(1.10)
3
= $75.13
PV = FV
3
(PVIF,10%,3) = $100x0.7513=$75.13

FV= 100
0 1 2 3
10%
PV?
2-30
Future Value of an Ordinary Annuity
FV of first A = A [1+i]
n-1

FV of 2nd A = A [1+i]
n-2

FV of 3rd A = A [1+i]
n-3


FV of (n-2)
th
A = A (1+i)
2

FV of (n-1)
th
A = A (1+i)
1

FV of n
th
A = A
Thus the future value of this ordinary annuity (of the end) will be:
FVA
ord
= A [1+i]
n-1
+A [1+i]
n-2
++A (1+i)
1
+A
= A [1+(1+i)+(1+i)
2
++(1+i)
n-1
]
A sum of the n
th
first term of a geometric progression with first term U
1
=A and
random ratio q=(1+i), equal U
1
(1-q
n
)/1-q
Future Value Interest Factor
Annuity values given in
table (A.2)





) , , .(
1 ) 1 (
. n i FVIFA A
i
i
A FVA
n
ord
=
(

+
=
2-31
Future Value of an Annuity Due
FV of first A = A [1+i]
n

FV of 2nd A = A [1+i]
n-1

FV of 3rd A = A [1+i]
n-2


FV of (n-1)
th
A = A (1+i)
2

FV of n
th
A = A (1+i)
Thus the future value of this ordinary annuity (of the beginning) will be:
FVA
due
= A [1+i]
n
+A [1+i]
n-1
++A (1+i)
2
+A(1+i)
= A(1+i).[1+(1+i)+(1+i)
2
++(1+i)
n-1
]
A sum of the n
th
first term of a geometric progression with first term U
1
=A(1+i)
and random ratio q=(1+i), equal U
1
=(1-q
n
)/1-q






) 1 .( ) 1 (
1 ) 1 (
. i FVA i
i
i
A FVA
ord
n
due
+ = +
(

+
=
2-32
Exemple 6: Future Value
Compute the FV of $100 payments occurring at the
end of each period for 3 years, interest rate i=10%.
FVA
ord
= 100[(1+10%)
3
-1]/10%=$331
=100(FVIFA,10%,3) = 100x3.31 = $331

Compute the FV of $100 payments occurring at the
beginning of each period for 3 years, interest rate
i=10%.
FVA
due
= 100x(1+10%)[(1+10%)
3
-1]/10%=$364.10
= FVA
ord
(1+i) = $331(1.10) = $364.10
2-33
Present Value of an Ordinary Annuity
PV of first A = A [1+i]
-1

PV of 2nd A = A [1+i]
-2

PV of 3rd A = A [1+i]
-3


PV of (n-1)
th
A = A (1+i)
-(n-1)

PV of n
th
A = A (1+i)
-n

Thus the Present value of this ordinary annuity (of the end) will be:
PVA
ord
= A [1+i]
-1
+A [1+i]
-2
++A (1+i)
-(n-1)
+A(1+i)
-n

= A(1+i)
-n
[1+(1+i)+(1+i)
2
++(1+i)
n-1
]
A sum of the n
th
first term of a geometric progression with first term
U
1
=A(1+i)
-n

and random ratio q=(1+i), equal U
1
(1-q
n
)/1-q
Present Value Interest Factor
Annuity values given in
table (A.4)





) , , .(
) 1 ( 1
. n i PVIFA A
i
i
A PVA
n
ord
=
(

+
=

2-34
Present Value of an Annuity Due
PV of first A = A
PV of 2nd A = A [1+i]
-1

PV of 3rd A = A [1+i]
-2


PV of (n-1)
th
A = A (1+i)
-(n-2)

PV of n
th
A = A (1+i)
-(n-1)

Thus the Present value of this ordinary annuity (of the end) will be:
PVA
due
= A +A [1+i]
-1
++A (1+i)
-(n-2)
+A(1+i)
-(n-1)

= A(1+i)
-(n-1)
[1+(1+i)+(1+i)
2
++(1+i)
n-1
]
A sum of the n
th
first term of a geometric progression with first term
U
1
=A(1+i)
-(n-1)

and random ratio q=(1+i), equal U
1
(1-q
n
)/1-q





) 1 .( ) 1 (
) 1 ( 1
. i PVA i
i
i
A PVA
ord
n
due
+ = +
(

+
=

2-35
Exemple 7: Present Value
Compute the PV of $100 payments occurring at the
end of each period for 3 years, interest rate i=10%.
FVA
ord
= 100[1-(1+10%)
-3
]/10%=$248.69
=100(PVIFA,10%,3) = 100x2.4869 = $248.69

Compute the PV of $100 payments occurring at the
beginning of each period for 3 years, interest rate
i=10%.
PVA
due
= 100x(1+10%)[1-(1+10%)
-3
-1]/10%= $273.55
= PVA
ord
(1+i) = $248.69(1.10) = $273.55
2-36
Example 8: What is the Present Value at 10% of
a 10-year ordinary annuity? A 25-year ordinary
annuity? A perpetuity?
10-year ord annuity
PV = 100[1-(1.1)
-10
]/0.1=

$614.46

25-year ord annuity
PV = 100[1-(1.1)
-25
]/0.1=

$907.70

Perpetuity
PV = PMT / i = $100/0.1 = $1,000
2-37
Will the FV of a lump sum be larger or
smaller if compounded more often,
holding the stated interest i% constant?
LARGER, as the more frequently compounding
occurs, interest is earned on interest more often.
Annually: FV
3
= $100(1.10)
3
= $133.10
0
1 2 3
10%
100 133.10
Semiannually: FV
6
= $100(1.05)
6
= $134.01
0 1 2 3
5%
4 5 6
134.01
1 2 3
0
100
2-38
Nominal Annual interest rate
and Periodic rate
Nominal rate (I
NOM
): also called the quoted or state
rate. An annual rate that ignores compounding
effects.
I
NOM
is stated in contracts. Periods must also be
given, e.g. 8% compounded Quarterly or 8%
compounded Daily.
Periodic rate (I
PER
): amount of interest charged each
period, e.g. monthly or quarterly.
I
PER
= I
NOM
/ M, where M is the number of
compounding periods per year. M = 4 for quarterly,
M= 12 for monthly and M = 365 for daily
compounding.
2-39
Nominal Annual interest rate
and Periodic rate
Nominal rate (I
NOM
)
Periodic rate (I
PER
):
I
PER
= I
NOM
/ M
where M is the number of compounding periods per
year. M = 4 for quarterly, M= 12 for monthly and
M = 365 for monthly compounding.
i
SEMIANNUALY
= I
NOM
/2
i
QUARTERLY
= I
NOM
/4
i
MONTHLY
= I
NOM
/12
i
DAILY
= I
NOM
/365

2-40
Effective interest rate
Effective (or equivalent) annual rate (I
eff
=
I
eq
) is the annual rate of interest actually
being earned, that reflects the impact of
multiple compounding during the year.

I
eff
= ( 1 + I
NOM
/ M )
M
1

I
eff
is the annual effective rate
I
NOM
is the annual nominal rate
M is the number of compounding periods per year
2-41
Example 9: What is the Annual Effective Rate
equivalent to a nominal rate I
NOM
=10%
compounded semiannually?
100 FV
1
= 100(1.1) =110
0 1
i=10%
100 FV
1
=100(1.05) FV
2
=100(1.05)
2
=110.25

1 2 0
i/2=5% i/2=5%
10% compounded
annually
10% compounded
semi-annually
The annual rate equivalent to nominal rate of 10% compounded semi-
annually is i
eff
solving:
100(1.05)
2
=100(1+i
eff
)
i
eff
= (1+05)
2
-1 = 10.25%
We should be indifferent between receiving 10.25% annual interest
and receiving 10% interest, compounded semiannually.
2-42
I
NOM
i
SEMIANNUALY
= I
NOM
/2 i
eff
= (1+ I
NOM
/2)
2
-1
i
QUARTERLY
= I
NOM
/4 i
eff
= (1+ I
NOM
/4)
4
-1
i
MONTHLY
= I
NOM
/12 i
eff
= (1+ I
NOM
/12)
12
-1
i
DAILY
= I
NOM
/365 i
eff
= (1+ I
NOM
/365)
365
-1

The Equivalence relation:
(1+i
eff
)= (1+ I
NOM
/2)
2
=(1+ I
NOM
/4)
4

=(1+ I
NOM
/12)
12
= (1+ I
NOM
/365)
365

The Equivalence Relation
2-43
Compute the effective rate equivalent to a
nominal rate of 10% compounded semiannualy,
quaterly, monthly, daily.
I
NOM
= 10%

EFF
SEMIANNUALY
= (1+10%/2)
2
-1 =10.25%
EFF
QUARTERLY
= (1+10%/4)
4
-1 = 10.38%
EFF
MONTHLY
= (1+10%/12)
12
-1= 10.47%
EFF
DAILY (365)
= (1+10%/365)
365
-1=10.52%

2-44
Investments with different compounding
intervals provide different effective returns.
To compare investments with different
compounding intervals, you must look at their
effective returns (I
Eff
%).
See how the effective return varies between
investments with the same nominal rate, but
different compounding intervals.

Why is it important to consider
effective rates of return?
2-45
When is each rate used?
I
NOM
written into contracts, quoted by
banks and brokers. Not used in
calculations or shown on time lines.
I
PER
Used in calculations and shown on
time lines. If M = 1, I
NOM
= I
PER
=
EAR.
EAR Used to compare returns on
investments with different payments
per year. Used in calculations when
annuity payments dont match
compounding periods.
2-46
Example 11: What is the FV of $100 after 3
years under 10% semiannual compounding?
Quarterly compounding?
$134.49 0.1/4) (1 $100 FV
$134.01 (1.05) $100 FV
)
2
0.10
1 ( $100 FV
)
M
I
1 ( PV FV
3 4
3Q
6
3S
3 2
3S
N M
NOM
n
= + =
= =
+ =
+ =

2-47
Can the effective rate ever be
equal to the nominal rate?
I
eff
= ( 1 + I
NOM
/ M )
M
1

Yes, but only if annual compounding
is used, i.e., if M = 1.

If M > 1, I
eff
will always be greater
than the nominal rate.
2-48
Example 12: Whats the FV of a 3-year $100
annuity, if the quoted interest rate is 10%,
compounded semiannually?
Payments occur annually, but compounding
occurs every 6 months.
Cannot use normal annuity valuation
techniques.
0 1
100
2 3
5%
4 5
100 100
6
2-49
Method 1:
Compound each cash flow

110.25
121.55
331.80
FV
3
= $100(1.05)
4
+ $100(1.05)
2
+ $100
FV
3
= $331.80
0 1
100
2 3
5%
4 5
100
6
100
2-50
Method 2:
Find the I
eff
and treat as an annuity

I
eff
= (1 + 10%/2 )
2
1 = 10.25%.




FV
3
= 100 [(1+10.25%)
3
-1 ]/10.25%


= $331.80
100
FV
3
= ?
0 1 2 3
10.25%
100 100
2-51
Loan amortization

Amortization refers to the process of paying off a
debt (often from a loan or mortgage) over time
through regular payments.

A portion of each payment is for interest while
the remaining amount is applied towards the
principal balance


2-52
Loan and required annual
payments
PMT
n

0 1 2 n
i%
PMT
2
PMT
1
Loan
int
1

int
2

int
n

Principal
1
Principal
2
Principal
n



A portion of each payment is for interest while the
remaining amount is applied towards the principal balance
2-53
Loan Amortization Schedule
(General case)
An amortization schedule is a table detailing each
periodic payment on an amortizing loan

L
n-1
= P
n
PMT
n
= P
n
(1+i)

L
0
= P
1
+ P
2

+.. + P
n

Period Debt in beginning
of period
Interest Principal Loan payment
(Annuity)
Debt remaining
in the end of
Period
1
2
.
.
.
n-1
n
L
0
(or D
0
)

L
1
= L
0
- P
1
.
.
.
L
n-2
=L
n-3
- P
n-2
L
n-1
=L
n-2
- P
n-1
I
1
=i.L
0

I
2
=i.L
1

.
.
.
I
n-1
=i.L
n-2

I
n
=i.L
n-1

P
1
P
2
.
.
.
P
n-1
P
n
PMT
1
=P1+ i.L
0

PMT
2
=P
2
+ i.L
1

.
.
.
PMT
n-1
=P
n-1
+ i.L
n-2

PMT
n
= P
n
+ i.L
n-1

L
1
= L
0
- P
1
L
2
=L
1
- P
2
.
.
.
L
n-1
=L
n-2
- P
n-1
L
n
=L
n-1
P
n
=0


2-54
loan amortization rules
case of reimbursement through constant
annuity

Link between Principal portions amounts: P
k
= P
j
(1+i)
k-j

Link between the capital Borrowed (L
0
) and the annual Payment (PMT)


Link between the capital Borrowed (L
0
) and the First Principal portion (P
1
)



Link between the amount of the loan (L
0
) and the amount of the loan not yet
reimbursed (L
k
)
L
k
is the debt not yet reimbursed at the end of period k.





(

+
=

i
i
PMT L
n
) 1 ( 1
.
0
(

+
=
i
i
P L
n
1 ) 1 (
.
1 0
(

+
=
i
i
P L L
k
k
1 ) 1 (
.
1 0
2-55
Loan Amortization with equal
Payements
EXAMPLE 13: Construct an
amortization schedule for a $1,000,
10% annual rate loan with 3 equal
payments.

2-56
Step 1:
Find the required annual payment
(

+
=

i
i
PMT Loan
n
) 1 ( 1
.
(

+
=
n
i
i
Loan PMT
) 1 ( 1
.
11 . 402 $
%) 10 1 ( 1
% 10
000 , 1
3
=
(

+
=

PMT
PMT
0 1 2 3
10%
PMT
PMT PMT Loan
=$1,000
2-57
Step 2:
Find the interest paid in Year 1
The borrower will owe interest upon the
initial balance at the end of the first
year.
Interest to be paid in the first year can
be found by multiplying the beginning
balance by the interest rate.

INT
t
= Beg bal
t
(I)
INT
1
= $1,000 (0.10) = $100
2-58
Step 3:
Find the principal repaid in Year 1
If a payment of $402.11 was made at
the end of the first year and $100 was
paid toward interest, the remaining
value must represent the amount of
principal repaid.

PRIN
1
= PMT INT
1

= $402.11 - $100 = $302.11
2-59
Step 4:
Find the ending balance after Year 1
To find the balance at the end of the
period, subtract the amount paid
toward principal from the beginning
balance.

END BAL = BEG BAL PRIN
= $1,000 - $302.11
= $697.89
2-60
Constructing an amortization table:
Repeat steps 1 4 until end of loan
Interest paid declines with each payment as
the balance declines.
Year
BEG
BAL PMT INT PRIN
END
BAL
1 $1,000 $402 $100 $302 $698
2 698 402 70 332 366
3 366 402 37 366 0
TOTAL 1,206.34 206.34 $1,000