632598256894

From Exhibit 4.20, we see that as the principal amount decreases, the amount put toward the
principal increases, and the annual interest due decreases.
Additional Exercise on Amortizing Loans
When most consumers shop for home loans, they compare interest rates. For this exercise, we consider
the same principal loan amount of $200,000 over 30 years, but with different interest rates of 4.89%
and 5.25%. We will compare only single annual payments for this exercise. To review additional
exercises, including a monthly payment schedule for this exercise, check out the Web site for this
chapter. Using Excel, we determine our annual payments to be $12,847.61 at 4.89% and $13,383.39 at
5.25% (see Exhibit 4.21).
From the amortization schedule, Exhibit 4.22, we see that over the term of the loan, the higher
interest rate costs the borrower more than $16,000 in additional interest payments.
If you are working with Excel online, you can find an excellent mortgage and loan amortization
schedule by going to the “Type a question for help” box in Excel, enter “amortization”, and then select
the table that best suits your needs.
Irregular or Uneven Cash Flows
In earlier topics in this chapter, our discussions represented even cash flows, with calculations of
future and present values of annuities. In discussing annuities, we stated that annuities must pay an
equal amount, at a specific time interval, for a specific time period. An irregular cash flow means that
cash flow varies over time. For example, banks adjust their interest rates on savings and variable-rate
home loans, and companies adjust their annual stock dividends. All are examples of uneven cash
flows.