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Finance 2

The document provides an overview of loan amortization, detailing its concept and various types, including straight-line, interest-only, and negative amortization. It includes illustrative examples and practice problems for each type, demonstrating how payments are structured over time. The document aims to enhance understanding of loan amortization calculations and their implications.

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13 views14 pages

Finance 2

The document provides an overview of loan amortization, detailing its concept and various types, including straight-line, interest-only, and negative amortization. It includes illustrative examples and practice problems for each type, demonstrating how payments are structured over time. The document aims to enhance understanding of loan amortization calculations and their implications.

Uploaded by

louisemaningo92
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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LOAN

AMORTIZATION
Learning Objectives:
1.Understand the concept of loan amortization.
2.Identify the different types of loan
amortization.
3.Compute the different types of loan
amortization.
Loan Amortization
Amortization is a form of financing that
involves paying off a loan’s principal and
interest through fixed, regular payments over
the life of the loan. Under an amortization
repayment structure, the lender spreads the
total amount owed over several payments.
-Doromal, G. 2023. Asialink
Finance
TYPES OF LOAN
AMORTIZATION
Straight Loan Amortization
The straight-line amortization concept can also be
applied to the repayment of a loan via a series of
periodic payments that are in the same amount. Each
of these payments includes an interest and principal
component. Early in the series of payments, most
payments are comprised of interest charges, with
modest principal repayments. As the principal
repayments gradually reduce the outstanding amount
of the loan, the proportion of interest expense in each
successive payment declines, allowing for an
increased proportion of each payment to be assigned
1. Straight Line
Amortization
Illustrative example: On July 1, 2022, DEF Company acquired a 3-year loan amounting to
3,000,000 from ABC Bank at the rate of 10% per annum. The loan is payable semi-annually
until the full amount is paid. Below is an amortization table for the loan.
Periods Outstanding Principal *Interest Total Payment at the
Principal Payment (Outstanding End of 6 Months
(Principal Loan– (3,000,000/3/2) Principal x 5%) (Principal Payment +
Principal Interest
Payment )
1 3,000,000 500,000 150,000 650,000

2 2,500,000 500,000 125,000 625,000

3 2,000,000 500,000 100,000 600,000

4 1,500,000 500,000 75,000 575,000

5 1,000,000 500,000 50,000 550,000

6 500,000 500,000 25,000 525,000


Practice:
GM Company borrowed P2,000,000 payable for
3 years from a bank. The loan has an annual
interest rate of 10% and the principal is payable
semi-annually. Prepare an amortization
schedule.
Interest-Only Loan
Amortization
Interest-only loan is a type of mortgage that require you
to only pay interest on the loan for a specified period.
At the end of this period, your loan converts to an
amortization schedule where you begin to pay back the
principal amount as well as interest.
Though interest-only loans may give you a lower initial
monthly payment, they come with risks that are
important consider.
2. Interest-Only
Amortization
Illustrative example: On July 1, 2022, DEF Company acquired a 3-year loan amounting to
3,000,000 from ABC Bank at the rate of 10% per annum. The loan is payable with interest
only for 1 year and will be paid semi-annually until the full payment of the loan. Below is
an amortization table for the loan.
Periods Outstanding Principal *Interest Total Payment at the
Principal Payment (Outstanding End of 6 Months
(Principal Loan– (3,000,000/4) Principal x 5%) (Principal Payment +
Principal Payment ) Interest
1 3,000,000 - 150,000 150,000

2 3,000,000 - 150,000 150,000

3 3,000,000 750,000 150,000 900,000

4 2,250,000 750,000 112,500 862,500

5 1,500,000 750,000 75,000 825,000

6 750,000 750,000 37,500 787,500


Practice
GM Company acquired a 3-year loan amounting
to 2,000,000 with the rate of 10% per annum.
The loan is payable with interest only for 1 year
and will be paid semi-annually until the full
payment of the loan. Show an amortization
table.
Negative Loan Amortization
Negative amortization results from the interest
on a loan being smaller than the loan payment.
This can cause the principal, or loan balance, to
increase because of unpaid interest. With
negative amortization, the amount you owe can
increase if you don't pay enough to cover both
the loan payment and the interest.
3. Negative Loan Amortization
Illustrative example: On July 1, 2022, DEF Company acquired a 5-year loan amounting to
3,000,000 from ABC Bank at 10% per annum using the PVIFA. However, the company fails
to pay its loan both the interest and principal on the 2nd year.
Periods Outstanding Equal Principal *Interest Total Payment at the
Principal Payment (Outstanding End of 1 Year
(Principal Loan– (3,000,000/PVIFA) Principal x 10%) (Principal Payment +
Principal Payment ) Interest
1 3,000,000 791,347.93 300,000 1,091,347.93

2 2,208,652.07 0 220,865.21 0

3 2,429,517.28 791,347.93 242,951.73 1,034,299.66

4 1,638,169.35 791,347.93 163,816.94 955,164.87

5 846,821.42 791,347.93 84,682.14 1,722,851.49


3. Negative Loan Amortization
Illustrative example: On July 1, 2022, DEF Company acquired a 5-year loan amounting to
3,000,000 from ABC Bank at 10% per annum using the PVIFA. However, the company pays
only the interest on the 2nd year.
Periods Outstanding Equal Principal *Interest Total Payment at the
Principal Payment (Outstanding End of 1 Year
(Principal Loan– (3,000,000/PVIFA) Principal x 10%) (Principal Payment +
Principal Payment ) Interest
1 3,000,000 791,347.93 300,000 1,091,347.93

2 2,208,652.07 0 220,865.21 220,865.21

3 2,208,652.07 791,347.93 220,865.21 1,012,213.14

4 1,417,304.14 791,347.93 141,730.41 933,078.34

5 625,956.21 791,347.93 62,595.62 1,479,899.76


Practice
GM Company acquired a 4-year loan amounting
to 2,000,000 at the rate of 10% per annum. The
loan is payable annually until the full payment
of the loan using the PVIFA. Unfortunately, the
company fails to pay in the 2nd year both the
principal and the interest. Show the
amortization table.

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