Introduction to Finance

loan amortization schedule 
a 
schedule of the breakdown of each 
payment between interest and 
principal, as well as the remaining 
balance after each payment
TA B L E 9 . 5
Sample Loan Amortization Schedule
Year
Annual 
Payment
Interest 
Payment
Principal 
Repayment
Loan 
Balance
0
—
—
—
$20,000
1
$8,042
$2,000
$6,042
13,958
2
8,042
1,396
6,646
7,312
3
8,042
731
7,311*
0
*Because of rounding, the final principal repayment is off by $1.

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9.9 More Frequent Time Intervals and The Cost of Consumer Credit
241
 Spreadsheet Solution:
The fi nancial function solution would be,
= PMT(Rate,Nper,PV,FV,Type)
= PMT(.005,360,–100000,0,0)
= 
599.55
Unfortunately, due to rapidly rising housing prices during the decade prior to 2006, 
many home buyers needed increasingly larger loans to make their real property purchases. 
For example, a $200,000 fi xed-rate mortgage loan would result in a much higher monthly 
payment compared to a $100,000 loan. Rework the above fi nancial calculator and spread sheet 
solutions using a PV of –200000. The resulting doubled monthly payment of $1,199.10 means 
that fewer potential home buyers could qualify for these larger loans. 
While the need for larger loans was increasing, many lenders—in part encouraged by gov-
ernment offi
cials—also were willing to make subprime mortgage loans to individuals with poor 
credit scores or ratings in order to increase home ownership. These developments encouraged 
the increasing use of adjustable-rate mortgages (ARMs). Recall that an ARM, typically, has an 
interest rates tied to the bank prime rate or the Treasury bill rate, either of which normally is 
lower than long-term interest rates on fi xed-rate mortgage loans, making it easier for borrowers 
with low credit scores and/or those wanting to borrow larger amounts to get mortgage loans. 
Some lenders further off ered initial below-market “teaser” rates, such as 1 or 2 percent 
for the fi rst year or so on their ARM mortgage loans. Of course, when the “teaser” rate period 
ends, the ARM interest rate adjusts to the then-current market rate causing the possibility of 
a dramatic increase in monthly payments. Clearly, lenders lent (and individuals borrowed) 
mortgage loans characterized by high default risks.
As of the end of 2015, interest rates on home mortgage loans were at historically low 
levels. This translates to lower monthly mortgage payments for a specifi ed mortgage loan of, 
say, $200,000, suggesting that it would be easier for potential home buyers to qualify for mort-
gage loan fi nancing. However, because of recent mortgage loan defaults and mortgage loans 
that are underwater (i.e., the mortgage loan amount is greater than the value of the home) 
resulting from the bursting of the housing price bubble in mid-2006, lenders are requiring 
larger equity down payments on new mortgage loans.