Amortization

• The above steps are repeated each year until the mutually agreed period of loan is exhausted.

Example

A financial institution grants loan of $2,000,000 to an industrial unit at a cost of debt of 16% per annum. The lender requires the loan to be repaid in ten equal annual installments becoming due at the beginning of each year.
Required:

Work out the amortization table for the loan repayment.

Solution

Annual Installment = $2,000,000 / (PVIFAD) 16% , 10

Or through excel formula which is:

=PMT (0.16,10,2000000,0,1) = $356,726

An important use of amortization is in lease financing, mortgage loans, auto loans, consumer loans, and certain business loans. Periodic payment should not necessarily be annually it can monthly, quarterly, semiannually, or annually as per the loan indenture.

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