Financial Management: Core Concepts, Third Edition

5.3 Consumer Loans and Amortization Schedules

Twice in this chapter you have seen that the monthly payment is not one-twelfth of the annual payment. Why? Increasing the compounding periods per year and increasing the payments to more than once a year require us to revisit the typical consumer or business loan. By looking through the amortization window, you will see what happens when you increase the number of payments during the year for a loan repayment.

Recall the example we used in Chapter 4 for paying off a loan of $25,000 over a six-year period with an 8% annual percentage rate. The $5,407.88 ordinary annuity calculated in Chapter 4 was an annual payment, but for most loans, payments are monthly. If we converted this loan to monthly payments ...