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Published byAugustine McKenzie Modified over 9 years ago
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Notes on Loan Model
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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
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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
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Model Setup (cont.) Model Structure Assumptions –Flat (Fixed) payment CF is an annuity –Annual payments –Annual compounding
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Model Setup (cont.) Output variables –Constant Annual payment –Time varying Beginning balance each year Interest each year Principal repayment each year
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Supplemental Loan Amortization Homework
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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
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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
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Basic Amortized Loan Model Basic Loan Example Basic Loan Example
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