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Amortization Calculation:
Usually, whether you can afford a loan depends on whether you can afford
the periodic payment (commonly a monthly payment period). So, the most
important amortization formula is probably the calculation of the payment
amount per period.
Business Finance
Suppose you want to borrow money to buy a house. You are considering a
15-year or a 30-year loan. The lender offers different interest rates, reflecting
the differences in risks of shorter-term and longer-term lending. For the 15year loan, the annual rate is 6.25% (compounded monthly, with 180 equal
monthly payments). For the 30-year loan, the annual rate is 6.75%
(compounded monthly, with 360 monthly payments). If you borrow
$150,000, what would your monthly payments be for each loan?
Answer:
What is the stream of payments necessary to pay off an increasing sum? Use
the present value formula to calculate the present value of Pymtn deposited
at the end of n periods discounted at i percent:
PV = Pymtn * [(1+i)n - 1] / (1+i)n * i
Solve for Pymtn for the 15-year loan:
PV = Pymtn * [(1+i)n - 1] / (1+i)n * i
Pymt180 = $150,000 / [(1+.0625/12)180 - 1] / [(1 + .0625/12)180 * .
0625/12]
Pymt180 = $1,286.13
Standalone Risk:
Business Finance
Return:
Income received on an investment plus any change in market price, usually
expressed as a percent of the beginning market price of the investment.
R=
Pt-1
Dt + (Pt - Pt-1 )
Business Finance
Example:
The stock price for Stock A was $10 per share 1 year ago.
The stock is
R=
R= $1.00+ ($-o.5)
$10
R= $0.5/$10
R= $0.05*100= 5%
Risk:
The variability of returns from those that are expected.
Expected Return:
Business Finance
R = ( Ri )( Pi )
R is the expected
return for the
asset,
Ri is the returnThe
for the ith expe
cted
possibility, retur
Pi is the n, R,
for
probability ofStock
that return BW is
occurring, .09 or
9%
Standard
n is the total
number of
possibilities.
Stock BW
Business Finance
Ri
Pi
(Ri)(Pi)
-.15
.10
-.015
-.03
.20
-.006
Stock
BW
.09
.40
.
Ri Pi
(Ri)(Pi)
036
2
(R
R
)
(Pi)
.21 i
.20
.
042 -.15
.10
Standard
Deviation:
.33 .00576
.10
.
-.015
033 -.03
.20
Sum
1.00
-.006
.00288 .
090 .09
.40
.036
.00000
.21
.20
.042
.
00288
.33
.10
.033
.00576
Sum
1.00
.090
.01728
Business Finance
( Ri - R )
( Pi )
.01728
Coefficient of Variation:
.1315 or
13.15%
the mean of
that
distribution.
It is a measure
of RELATIVE
risk.
Business Finance
CV = / R
CV of BW = .
1315 / .09 =
1.46