Amortisation (DP IB Applications & Interpretation (AI)): Revision Note

Amortisation

What is amortisation?

• Amortisation means paying off a loan over a certain amount of time

  • e.g. a loan to buy a home

    • called a mortgage

• It is common to pay off a loan by making fixed regular repayments

  • e.g. repaying $1 000 per month to the loan company

    • The compounding period is a month

    • The number of compound periods per year is 12

    • The repayment made per period is $1 000

• Even though you are making fixed regular repayments

  • loan companies add interest to the remaining amount still owed

    • but eventually the amount owed will decrease

    • and you continue until you pay off the loan

How do I use the GDC for amortisation calculations?

• Your GDC has a finance package

  • for example

    • finance solver mode

    • TVM (time value of money) solver

• Input all the information given in the question into your GDC

  • Leave blank the quantity you are trying to find

  • The GDC will then find this value

• is the number of repayment periods

  • e.g. how long you plan to make fixed regular repayments for

  • % is the nominal annual interest rate

  • is initial value of the loan

    • The original amount of money borrowed

    • This is entered as a positive number

  • is the repayments made per period

    • How much money you repay the loan company every period

    • This is entered as a negative number

  • is the future value of the loan

    • This will be zero if the loan is paid off after the repayment periods

  • is the number of repayments per year

    • e.g. 12 for monthly repayments

  • is the compounding periods per year

    • e.g. 12 for monthly repayments

  • is the time during the year (or during the month) at which the repayment is made

    • assume this is the end of a period, unless told otherwise