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Recitation 09

Recitation 09. Announcements. Online quiz 5 Due today 5:00 pm Covers 2 videos 3 articles You are given 22 minutes to complete 22 questions for 22 points. Extra credit paper Topic approval is due by today . Online Quiz 6.

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Recitation 09

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  1. Recitation 09

  2. Announcements • Online quiz 5 • Due today 5:00 pm • Covers • 2 videos • 3 articles • You are given 22 minutes to complete 22 questions for 22 points. • Extra credit paper • Topic approval is due by today

  3. Online Quiz 6 • Starts on Monday, March 25th and is due 5:00 pm on Friday , March 29th • Covers (pages 197-213) • Insurance Basics • Ways to Deal with Risk • What Is Underwriting? • Do You Really Need Life Insurance? • Specific Steps to Calculate Your Life Insurance Needs • Types of Life Insurance • Borrowing from Insurance • An Insurance Mistake to Avoid • Thought Questions • Appendix to Chapter 10 • You are given 11 minutes to complete 11 questions for 11 points.

  4. TVM & Loan Amortization • Another application of TVM to credit is amortization • In most loans, you will have a series of equal payments over a period of time • The equal payments serve two functions • Paying back the principal (the original amount of the loan) • Servicing the interest associated with the loan • The cost of credit

  5. Intuition Behind Loan Amortization

  6. Interest on Most Loans

  7. Interest on Most Loans

  8. Amortization Schedule

  9. Where does the money go? • The portion of your payment that goes towards principal and the portion towards interest (varies over time) • In the beginning, more of your payment goes towards servicing the interest • Towards the end of the loan, more of your payment goes towards paying down the principal • This is why it takes time to build equity in a home • In a home loan, the interest is tax deductible, so it’s not a completely bad thing. If you refinance, you pull the equity back out

  10. Procedure for Loan Amortization • Calculate the payment per period • Determine the interest payment in Period t • Compute principal payment in Period

  11. Procedure for Loan Amortization • Determine ending balance in Period t. • For next payment start again at Step 2 and repeat

  12. Example: Loan Amortization • You take out a loan for $4,000 at an annual interest rate of 7%. You must pay back the loan in 5 annual installments. What is your annual payment? How much of the principal is still outstanding after you make the first payment?

  13. Solution • 4 000 – 695.56= 3.304.44

  14. Example: Loan Amortization • I decide to purchase a new car for $33,165. What is the outstanding balance on the loan after I make the second payment if I have a 5 year loan with monthly payments and a 6.84 APR?

  15. Solution • 32 699.41 – 468.23= 32 231.18

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