Debt

1

Interest rate:

Annual Percentage RateAPR

2

Payment: Two components

• Interest payment: Owed to lender for privilege of using his/her/its money . . . How lenders make a profit

• Payment against principal: Portion of payment used to pay off the amount owed (amortization)

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Interest payment

• If one payment per year:INT=balance x APRWhere APR has been converted to proportion

• If more than one payment per year:INT=balance x APR/nWhere n is the number of payments per year

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Principal

1. The original amount of the loan2. A synonym for balance: The amount still to

be paid off3. The portion of a payment applied to the

reduction of the balance

5

PAYMENT = INTEREST + PRINCIPAL

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PRINCIPAL = PAYMENT - INTEREST

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Fixed and variable payment schedules

Fixed means the amount of time for amortization of the debt is set, then the payment amount is computed

e.g.: 5 year car loan, 30 year mortgage

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Variable payment schedule:

Amount of payment is set, then the amount of time for amortization is computed.

e.g.: Payment of $100 per month on credit card debt until debt is completely paid, not matter how long it takes

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Amortization table:Fixed payment schedule

Payment Period

Beginning Balance Payment Interest Principal

EndingBalance

(blank) (blank) (blank) (blank) (blank) Enter original amount of debt

1 =Ending balance, previous row

=PMT function * -1

=Beginning balance * APR/n

=Payment - Interest

=Beginning Balance - Principal

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Amortization table:Variable payment schedule

Payment Period

Beginning Balance Payment Interest Principal

EndingBalance

(blank) (blank) (blank) (blank) (blank) Enter original amount of debt

1 =Ending balance, previous row

=amount of payment(equals sign must be entered)

=Beginning balance * APR/n

=Payment - Interest

=Beginning Balance - Principal

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