Time Value of Money Loan Loan A debt

Time Value of Money Loan

Loan • A debt evidenced by a note between the borrower and lender. • It specifies the original loan amount (principle) and the amount and date of repayments. Ø The borrower initially receives an amount of money from the lender Ø The borrower is obligated to pay back the principle and interests to the lender later

Loan Types • How does the borrower repay the lender? Ø Pure Discount Loan: A single lump sum paid at some time in the future Ø Interest-only Loan: Interest paid each period and the entire principle repaid at some point in the future Ø Amortized Loan: Part of the loan amount repaid over time

Pure Discount Loan •

Questions and Problems 57 This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $15, 000 for one year. The interest rate is 14 percent. You and the lender agree that the interest on the loan will be. 14 × $15, 000 = $2, 100. So, the lender deducts this interest amount from the loan up front and gives you $12, 900. In this case, we say that the discount is $2, 100. What is the interest rate on the loan?

Amortized Loan: Equal Payments •

Amortized Loan: Equal Principle Payments •

"Balloon" or "Bullet" Loans • Balloon loans are loans that are amortized over a relatively long schedule, but at some point during the life of the loan, the remaining principal of the loan is repaid • Example in Excel