Question

explain the changes in interest expense and principal reduction as an amortized loan age.

Answer 1

Chnages in interest rate and principal reduction as an amortized loan age
The periodic repayment of a loan has 2 components -Principle and interest.The interest expense and the principle portion changes as the time goes by(amortisation loan age).During the initial periods of repayments the interest expense constitutes major portion of periodic payment while principle payments accounts for small part.Similarly with the passage of time the principle portion occupy major part of periodic payment and interest potion accounts for a smaller part.
								Example
								Consider a loan for $20000,interest rate =10%,time= 10 years,Annual payments=$3255
								Loan amortisation table
(a)	(b)	(.C)=b*10%	(d)	(e)=d-c	(.f)=b+c-d
Pmt no.	Beginning balance	Interest	Payment	Applied Principle	Ending balance
1	20000	2000	3255.00	1255.00	18745.00
2	18745.00	1874.5	3255.00	1380.50	17364.50
3	17364.50	1736.45	3255.00	1518.55	15845.95
4	15845.95	1584.595	3255.00	1670.41	14175.55
5	14175.55	1417.5545	3255.00	1837.45	12338.10
6	12338.10	1233.80995	3255.00	2021.19	10316.91
7	10316.91	1031.69095	3255.00	2223.31	8093.60
8	8093.60	809.36004	3255.00	2445.64	5647.96
9	5647.96	564.796043	3255.00	2690.20	2957.76
10	2957.76	295.775648	3255.00	2959.22	0.00
	You can see in the above table ,the interest portion in year 1 is $2000 and principle portion is $ 1255 (the interest portion covers major portion of periodic payments of $3255.Similarly in the 10 th year (as the amortisation loan age) the principle portion is $2959.22 ,now principle portion covers major portion of periodic payment of $3255
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