lecture no.13 chapter 4 contemporary engineering economics copyright © 2010 contemporary...
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Lecture No.13Chapter 4
Contemporary Engineering EconomicsCopyright © 2010
Contemporary Engineering Economics, 5th edition, © 2010
Debt ManagementCredit card debt and commercial loans are among the most significant financial transactions involving interest.
Contemporary Engineering Economics, 5th edition, © 2010
Example 4.12 Loan Balance, Principal, and Interest: Tabular Approach
Given: P = $5,000, i = 12% APR, N = 24 months
Find: A, and loan repayment schedule
A = $5,000(A/P, 1%, 24) = $235.37
Contemporary Engineering Economics, 5th edition, © 2010
Contemporary Engineering Economics, 5th edition, © 2010
The interest payment in period n is, In= i x Bn-1 = A x (P/A, i, N-n+1) x i
Example 4.13 Loan Balance, Principal, and Interest: Remaining –Balance Method
Given: P = $5,000, i = 12% APR, N = 24 months
Find: Loan balance, principal, and interest payment for the 6th payment
A = $5,000(A/P, 1%, 24) = $235.37
Contemporary Engineering Economics, 5th edition, © 2010
Contemporary Engineering Economics, 5th edition, © 2010
Example 4.13 Continued
To compute I6, we first need to find B5,
B5 = $235.37 x (P/A, 1%, 19) = $ 4,054.44
Then, I6 = $ 4,054.44 x 0,01 = $ 40,54. Note that the principal payment is the remaining part of the total monthly payment amount $235.37. Thus,
P6 = $235.37 – 40.54 = $194.83
The remaining balance after the 6th payment, B6, is equal to $3,859.62 as computed on the previous slide.
Home MortgageTypes of Home Mortgages The Cost of a MortgageFixed-rate mortgageAdjustable-rate mortgageHybrid Mortgage
Loan amountLoan termPayment frequencyPoints (prepaid interest)FeesTypes of mortgages
Contemporary Engineering Economics, 5th edition, © 2010
Example 4.16 An Interest-Only versus a Fully Amortized Mortgage
Given: P = $200,000, APR = 6.6% or 0.55% per month, and N = 30 years Find: (a) monthly payment; (b) interest payments during the first year of ownership of the home.
Option 1: A fully amortized payment option. Option 2: A five-year interest-only option.
•(a) Monthly payments.
(b) Interest payments:
Contemporary Engineering Economics, 5th edition, © 2010
Calculating the Monthly Payments with Adjustable-Rate Mortgage (ARMs) Index – a guide that lenders use to
measure interest rate changes Margin – an interest rate that
represents the lender’s cost of doing business plus the profit
Adjustment period – the period between potential interest rate adjustments (e.g., 3/1 means your interest rate is fixed for the first 3 years then could be adjusted every year thereafter.)
Interest rate cap – a limit on the amount your interest can change (a periodic cap and a lifetime cap)
Payment cap – how much your monthly payment can increase at each adjustment
Contemporary Engineering Economics, 5th edition, © 2010