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Sir in this question they ask us to make annual equal principal installments of $10m 18% loan. Starting from year 1 we make repayments of 2000 each year for 5 years.
Sir I have a confusion. I remember having solved questions where principal was divided by the annuity factor to give equal amount repaid each year. In what situation could that occur? that is, where we divide the total amount by annuity factor?
For e.g we had a loan of 10m At 18%, we would divide 10m by 3.127 to give a repayment of 3198. does that include interest element as well. how differently would such a question be phrased?
thankyou
We divide by the annuity factor when there are equal repayments that cover both the principal and the interest.
The question will state whether the repayments cover interest as well, or just cover the principal.
Please also tell why in this same question the interest is calculated at the loan amount outstanding at the start of the year? Will this always be the case in such questions, becuase bpp hasn’t mentioned on what amount interest have to be calculated, just calculated it on the start of year amount?
Interest will always be calculated own the balance at the start of the year (unless obviously the question said different) because this is what happens in practice. If you owe money then interest is calculated on what was owing for the year.
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