Financial Management: Core Concepts, Third Edition

4.6 Amortization Schedules

How do we find the remaining principal at the end of each year with an amortized loan repayment schedule? We need to determine how much of each annual payment is for interest and then apply the remaining amount against the principal. Each succeeding year starts with the new lower principal, and the interest owed for that year is simply the interest rate times this new lower principal amount. We call the listing of the annual interest expense, the reduction of principal each year, and the ending balance or remaining principal an amortization schedule of the payoff of the loan. A primary feature of an amortization schedule is that it shows the remaining principal after each payment.

Let's look at an amortization schedule ...