Notes on Loan Model

Amortization Schedule  Beginning Principal Balance –A form of cumulative (declining) cash flows  The same modeling technique applies to many accounting and finance calculations  Tip –First year formulas are different from other years –Create model such that formulas from year 2 can be copied to all other years

Flat Payment Schedules Example  Model Setup  Financial Decision –Determine loan payment amount –Analyze loan balance, interest and principal repayment  Input variables (all constant) –Loan Original Principal –Interest –Loan Term

Model Setup (cont.)  Model Structure Assumptions –Flat (Fixed) payment CF is an annuity –Annual payments –Annual compounding

Model Setup (cont.)  Output variables –Constant Annual payment –Time varying Beginning balance each year Interest each year Principal repayment each year

Supplemental Loan Amortization Homework

Reminder on Amortization Table Formulas  Initial year –Beginning Principal Balance = original loan amount  Subsequent years –Beginning Principal Balance = previous beginning principal balance – previous principal component of payment

Amortization Table Formulas (cont.)  All other formulas are the same for all years –Periodic Payment: fixed, computed as an annuity PMT() –Interest component = Periodic interest rate x current beginning principal balance IPMT() function in Excel –Principal Component = Periodic Payment – Interest component PPMT() function in Excel

Basic Amortized Loan Model  Basic Loan Example Basic Loan Example