Loan Amortization - PDF

**LOAN AMORTIZATION** is a loan that is to be repaid in equal payments over a specified period of time. Example On July 1, 2015, DD Company borrowed P3 million from ASC Bank at the rate of 10% a year. The loan is paid at the rate of P500,000 every December 31 and June 30 until the full amount is...

**LOAN AMORTIZATION** is a loan that is to be repaid in equal payments over a specified period of time. Example On July 1, 2015, DD Company borrowed P3 million from ASC Bank at the rate of 10% a year. The loan is paid at the rate of P500,000 every December 31 and June 30 until the full amount is paid. Below is an amortization table for the loan **Amortization Table for P3-million Loan** **Date** **Payments** **Interest** **Principal Payment** **Principal Balance** --------------- -------------- -------------- ----------------------- ----------------------- 3 000 000 Dec. 31, 2015 650 000 150 000 500 000 2 500 000 June 30, 2016 625 000 125 000 500 000 2 000 000 Dec. 31, 2016 600 000 100 000 500 000 1 500 000 June 30, 2017 575 000 75 000 500 000 1 000 000 Dec. 31, 2017 550 000 50 000 500 000 500 000 June 30, 2018 525 000 25 000 500 000 To compute for the interest expense from June 30 to December 31, 2015: Interest = 3 000 000 x 10% x (6/12) = 150 000 Example 2: You borrowed P 50 000 from a bank to buy a mobile phone. Assuming you need to repay the loan by equal payments at the end of every 6 months for 3 years at 10% interest compounded semi-annually. What is your periodic payment? Solution: Given: PV = P 50 000, i = 0.10/2, n= 2x3 = 6 [\$R = \\ \\frac{50\\ 000}{5.0757}\$]{.math.inline} = P 9 850.86 ACTIVITY Using the problem in example 9, construct an amortization schedule by filling up the table below. Show your solutions for column B by using the formula: I = Prt +-------------+-------------+-------------+-------------+-------------+ | Period | Periodic | Interest at | Amount | Outstanding | | | Payment at | 10% due at | repaid to | Principal | | | the end of | the end of | the | at the end | | | every 6 | every 6 | Principal | of every 6 | | | months | months | at the end | months | | | | | of every 6 | | | | A | B | months | D | | | | | | | | | | | C | | +=============+=============+=============+=============+=============+ | 0 | | | | P 50 000.00 | +-------------+-------------+-------------+-------------+-------------+ | 1 | | | | | +-------------+-------------+-------------+-------------+-------------+ | 2 | | | | | +-------------+-------------+-------------+-------------+-------------+ | 3 | | | | | +-------------+-------------+-------------+-------------+-------------+ | 4 | | | | | +-------------+-------------+-------------+-------------+-------------+ | 5 | | | | | +-------------+-------------+-------------+-------------+-------------+ | 6 | | | | | +-------------+-------------+-------------+-------------+-------------+ | Total | | | | | +-------------+-------------+-------------+-------------+-------------+ **LEARNING MODULES** NAME: LEARNING ACTIVITY \#03 GRADE & STRAND: BUSINESS FINANCE SECTION: ABM 12 SMITH & BECKER MS. LOUISE ANGELICA P. OCHEA QUARTER 2 MODULE 3 RISK RETURN TRADE OFF **INTRODUCTION:** In order to increase expected returns, an investor must accept more risk. **OBJECTIVES:** At the end of this lesson, you will be able - Define risk, return and risk-return trade off - Differentiate investment risks and risk tolerance; and - Explain the importance of portfolio management **Risk -- return trade off** In this regard, risk and return are directly related to an investment opportunity. In business, there is a principle that lower risk tends to give lower returns while higher risl tends to give higher risk. Investors have different levels of acceptance because it is primarily driven by the availability of resources while balancing the advantages and disadvantages of investment opportunities. This level of acceptance is called *risk tolerance* and is classified into conservative, moderate and aggressive. **Conservative Risk Tolerance** -- is a characteristics of an investor whose willingness in accepting risks is very low. This investor will expect to gain profit, with little to no disadvantage to them. **Moderated Risk Tolerance --** is a characteristics of an investor who is willing to put average resources and accept some risks. This investor will expect to gain above average profit while enduring little disadvantages. This type of investor is more likely to pull out an investment (if applicable) whenever risks are uncontrollable. **Aggressive Risk Tolerance --** is a characteristics of an investor who is willing to put more resources and accept maximum risks on high quality investment with high expectation of return. This investor has great knowledge about the industry and is willing to keep investment at a longer holding period until investment created the highest possible return but is prepared for the worst -- losing the entire investment. **Portfolio Management** is the planning of investment opportunities based on the risk tolerance of an investor to meet the financial objectives at a given time frame. On a more technical term portfolio management is used in investment discussions about stocks, bonds, time deposits, and other money market investments. Investors have the principle of "putting eggs in different baskets". This is called an **investment diversification.** In cases where the investor has stagnant or excess resources, they engage in different investing activities to gain profit. It can be used to put up a store market, time deposit, bonds, and foreign exchange. There baskets are called **portfolio**. Each portfolio us different in purpose, amount, risks, returns and time frame. A wise investor who is maintaining two or more accounts should keep investment portfolios to keep track of the growth or losses in each investment. It is important that investments have clear financial objectives, no matter how big or small the investment is. In investing time should be the investor's ally because time is one key for funds to grow. More than anything else, getting an investment requires continuous market study to enjoy substantial maximum profits.