Introduction to Finance

Table 9.5
illustrates the repayment process with a 
loan amortization schedule
, 
which shows the breakdown of each payment between interest and principal, as well as the 
remaining balance after each payment. Since the interest rate is 10 percent, the fi rst year 
interest will total $2,000 ($20,000 × 0.10). Subsequent interest payments are based on the 
remaining loan balances, which are smaller each year (also referred to as the 
declining 
balance
). Since $6,042 ($8,042 – $2,000) of the fi rst year’s $8,042 payment is used to repay 
part of the principal, the second year’s interest payment will only be $1,396 ($13,958 × 
0.10). The third, and last, payment covers the fi nal year’s interest of $731 plus the remain-
ing principal balance.
Real Estate Mortgage Loans with Monthly Payments
CRISIS
We discussed characteristics of home mortgages in Chapter 7. The traditional 
residential real mortgage loan has been a 30-year fi xed interest rate mortgage loan requiring 
equal monthly payments that would pay off , or amortize, the loan over its life. Let’s assume 
that you want to borrow $100,000 for 30 years, and the current interest rate is 6 percent. 
The mortgage requires you to make equal monthly payments so that the loan will be paid 
in full at maturity. What will be your monthly payment? We begin by fi rst determining that 
you will have to make 360 (12 times 30 years) monthly payments. Since the annual interest 
rate is 6 percent, you will pay .50 percent (6 percent divided by 12) interest per month. 
With this information, we can calculate your monthly payment using a fi nancial calculator 
as follows:
Financial Calculator Solution:
Inputs: .50 
360 
–100000
%i 
N 
PV
Press: CPT PMT
Solution: 599.55
You would need to make a $599.55 monthly payment.
Of course, Excel’s
 
PMT fi nancial function also can be used to solve for the monthly 
payment amount.