Loan Calculations and Interest Analysis
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Tricia Mae TorresLoan Calculations and Interest Analysis
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Tricia Mae TorresCommon questions
Powered by AIMore frequent compounding increases the future value of an investment due to the effect of interest compounding more often. For a principal compounding quarterly versus monthly, a higher future value accrues faster with monthly compounding as shown in the calculations for varying frequencies .
A higher down payment reduces the principal amount and thus the total interest paid over the loan period. In the 25% down payment scenario (135,000 principal), interest was P243,000, whereas with 10% down payment (162,000 pricipal), the interest increased to P283,500, making the lesser interest payment evident with a larger down payment .
Exact interest uses a 365-day year, while ordinary interest uses a 360-day year. For a 100-day period, exact interest is calculated as I = 2,200 x .07 x (100/365), yielding P42.19, whereas ordinary interest is I = 2,200 x .07 x (100/360), yielding P42.78, making ordinary interest higher .
The Banker’s Rule is preferable when the accounting industry standard of using a 360-day year is required for consistency, as it simplifies calculations in trade and finance, especially compared to exact interest which involves more precision with a 365-day year .
The true interest rate, or effective rate (reff), can be calculated using reff = r / (1 – rt), where r is the nominal rate and t is the time. For a 50,000 pesos loan at a 6% interest for 3 years, reff = .06 / (1 - .18) = 7.31% .
The down payment is 10% of 725,000 pesos, or 72,500, leaving a balance of 652,500. Monthly payments are computed as [652,500 (1 + .0635)] / (12 x 27) = 693,933.75 / 324, giving a monthly payment of P2,141.77 .
Two loans can have the same future value if they have the same principal and both satisfy the equation A = P(1+rt) where the product of the rate and time is the same. For example, a loan at 5% over 6 years equals a loan at 6% over 5 years, resulting in A = 1.3P for both, depending on having the same principal .
For an annual compounding rate, with P = 825 and r = 0.04 for t = 10 years, A = 825 (1.04)^10 = P1,221.20. For semi-annual compounding, with P = 3,250, r = 0.02, compounded twice per year for 5 years (10 total compounding), A = 3,250 (1.01)^10 = P3,590.02. Semi-annual compounding yields a higher value due to more frequent compounding .
The present value, P, is calculated using the formula P = I/rt, where I is the interest amount, r is the rate, and t is the time. An example calculation is P = 65,625 / (0.15 x 7), resulting in a present value of P62,500 .
Key factors include the principal amount, the interest rate, and the period (term) of the loan. Loans with varying interest rates and terms need careful balancing of these factors to ensure equivalent future values, achieved by maintaining the final amounts calculated as equal as represented in the examples provided .