Loan Amortization Using Present Value of Annuity Formula

Students can use this video to better understand Section 4.5 of "Corporate Finance" [12th Edition] by Ross, Westerfield, Jaffe and Jordan.
In this video I explain loan amortization using a numerical example. Specifically, I explain how loan amortization is a simple application of the Present Value of Annuity formula, and how one can, therefore, use this formula to calculate the constant periodic payment that needs to be made to retire the loan (with interest). I also construct a simple loan amortization table to show how the constant payment calculated retires the principal and interest expense overtime.

[@FeraldiMarco]

super! it took me over 15 videos to find this answer and you nailed it! thanks.... I was looking for the table you created to understand how interest and C were linked together. very well done, thanks

[@rahulprajapati4638]

Thank you so much for this immensely useful information, sir. Hoping for more of these kind of videos in the future🤞🤞Love from India❣❣

[@professorikram]

So nice of you! Thank you.

[@nakazzihadijjah1465]

Wow, so helpful, Detailed, got more than I needed, thanks

[@kaichuanyu5964]

sir, you are a legend!

[@mannasehmbunji9921]

This is so helpful

[@josemastery955]

Expert🙌🙌

[@balochkareem4931]

Thank you Sir.

[@olivermathiasen3594]

Man i have been struggle with this subject for so long. This video really helped me. Im 16 atm, and dont have chance for school atm. So im self studying and now i can finaly understand this subject. Thank you thank you thank you. Thank you so much. This means everything to me.

[@professorikram]

Kudos to you for self learning. If you feel stuck, reach out. Will try my best to help you.

[@potatoe8955]

what if the repayment is monthly?

[@Simran-oi4fi]

Divide interest rate with 12 then

[@Chumpwomp03]

​@Simran-oi4fi so instead of the rate 0.08 it would be 1.5? (Help i don't understand)

[@Chumpwomp03]

​@@Simran-oi4fi hopeee u coulddd responddd😭

[@professorikram]

@p.sahrasantiago751 could you tell me a little bit about how you got 1.5?

[@Chumpwomp03]

@professorikram Hello, I divided 12 to 8, that's why i got 1.5. (Pls enlighten me! 🙇‍♀️🙇‍♀️)

[@SamarthPandya]

Very well explained.I like the explanation

[@oxgn.]

How to solve the last part 10000=c(1-1/(1.08)^5/.08

[@ver0nica1982]

You are a wonderful teacher.

[@fsocietyyyyy]

you are a wonderful liar

[@hadirizmeen140]

Ado machan thank you bn

[@nambulaharriet7559]

Are we not supposed to divideth e interest by 12 months since it is saying annually

[@miyazaki2542]

sir i have a question, if it said beginning of each year, would the chart be same? or the interest be zero in the first year of installment?

[@professorikram]

Hello Miyazaki. If the payment is at the beginning of the year, then divide your answer by (1+r), where r is the interest rate. So, in the example above, you would do ($2,504.56/1.08) = $2,319.04. You will notice that the yearly payment is lower. That's because the first payment you make towards the loan is immediate and hence you don't accrue interest. Hope this helps!

[@miyazaki2542]

@@professorikram thank you so much, sir, i was having a hard time understanding the loan amortization schedule, your video and explanation helped me learning it, thank you for replying to my question.

[@Eliza-sm2en]

thank you

[@465marko]

If the bank asked me for a constant payment of "C", I think I'd get to the first one and be like "I'm broke, See?!?!"

[@professorikram]

😀

[@sashikaudaini3477]

thank you sir

[@professorikram]

Thank you Sashika! Also, I have recently created a website called SimpliTaught (www.SimpliTaught.com). It's in beta mode right now, but check it out. There, you can find curated content for your college textbooks. Would welcome any feedback.

[@jandogroniloa.881]

@@professorikram good day sir, what "t" Means for?, is it the number of payments to the given years? In my module is compounded quarterly for 3 years so the t=12?

[@fancypants5730]

I have no idea how he comes up with a loan of 10000 for 5 years at 8% to make the first payment of 2500???

[@trident1409]

watch the video carefully and beforehand know what is annuity.

[@ounoudmohamadhamie7872]

best of the best

[@amyhuang3974]

what if i have 3 annuities instead of once per year?

[@sidramasooma6941]

Saviour 💯❤️

[@aryaman4068]

This video is gold

[@professorikram]

Thank you Saksham! Also, I have recently created a website called SimpliTaught (www.SimpliTaught.com). It's in beta mode right now, but check it out. There, you can find curated content for your college textbooks. Would welcome any feedback.

[@essarbhatt585]

How to calculate cost to buy down interest

[@professorikram]

Hi Essar - I am not sure I fully understand your question. Can you rephrase?

[@Sky-pg6xy]

Just draw the whole line and then dash it :....0

[@ArijitMukhopadhyay]

Awesome!

[@levmade]

this explanation is way way better than what we had at our university lecture, thank you so much!