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A loan of $100000 is taken for five years at 9% interest p.a. payable along with principal in five years time. in bpp text its given that annual payment will be 100000÷3.890 (annuity factor) = $25707
My ques is ..is this $25707 really paid by company every year or it is just for accounting purpose
And real payment will be 9% interest and 1/5 of principal i.e 20000.
In 1st year 9000 + 20000= 29000
In 2nd year 9% of 80000 i.e 7200+ 20000 = 27200 and so on …
What will be the real amount which will be paid by the company ..25707 or like what i have written above?This is nothing to do with financial accounting – that is of no relevance to Paper FM.
However the loan is repaid, then the present value of the repayments discounted at 9% will always equal the amount borrowed of 100,000. (The only reason they end up paying back more than 9% is because of the interest at 9%, and discounting at 9% is effectively ‘removing’ the interest). (Make up some figures yourself and then discount – you will always end up with a PV of 100,000).
Your description of ‘real payment’ is not repaying an equal amount each year – your first two payments are different!!
If they pay a total of X each year for 5 years, then the PV of the repayments will be equal to X x (the 5 year annuity factor at 9%) and this must be equal to 100,000. Therefore X, the annual payment, will be 100,000 divided by 3.890.
Sir do you mean that fixed annual payment of 25707 uncludes both interest as well as primcipal amount?
Thanks
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