IEN255 Chapter 3 Leftovers Commercial Loan Transactions

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IEN255 Chapter 3 Leftovers Commercial Loan
Transactions

• Amortized Loans
• Bn Remaining Balance at the end of period n,
  with B0 P
• In Interest payment in period n, where In
  Bn-1i
• Pn Principle payment in period n.
• So, each payment can be defined as
• A Pn In

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Tabular Method

• Tabular method (spreadsheet)
• Interest at end of first period I1 B0i Pi
• Principle Payment at end of first period P1 A
  - Pi
• Balance remaining after first payment B1 B0 -
  P1 P - P1
• At the end of the second period
• I2 B1i (P - P1)i
• P2 A - (P - P1)i (A - P1i) P1i P1 (1 i)
• B2 B1 - P2 P - (P1 P2)
• and so on to page 146.

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Figure 3.18
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Remaining Balance Method

• (3.15) Bn A (P/A, i, N - n) (balance)
• (3.16) Bn-1i A(P/A, i, N - n 1) i (interest
  payment)
• (3.17) Pn A(P/A, i, N - n 1) (principle
  payment)
• Figure 3.19

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Add on Loans

• Simple Interest!!!
• Precalculated interest and paid in equal
  installments
• Quoted is add on rate (simple) ex - 12 2 years
• nominal is 21.60 !
• Effective is 23.87 !
• Again, to find use linear interpolation

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Variable rate mortgages

• mortgage - buying property
• monthly rates
• changing rate over time (rises a few years then
  fixes to a certain rate) or (tied to some index
  (T-Bills)
• figure3.22

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Bond Terminology

• Mortgage Bond - if default on bond, property
  backs bond
• Debenture Bond - simply pledge overall assets
• Par value - Face value (usually in even
  denominations (1000s))
• Maturity date - Date Par value repaid
• Coupon Rate - Interest rate paid (annual coupon
  rate)
• Discount Bond - A bond that sells below par
  (face) value
• Premium Bond - A bond that sells above par (face)
  value
• Market Price - Value of the bond

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Figure 3.23
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Bond valuation

• yield to maturity - interest rate of equivalence
• future interest face value receipts market
  price
• fig 3.24

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Interpolation to find interest rate

• pg 159

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IEN255 Summer99 Chapter 3 HW2

• Homework Assignment
• Chapter 3
• s 3.66 3.73 3.78
• Due with chapter 4 homework (likely Tues June 29)