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Hello sir,
For the amberle question, annual repayment of Bank loan, why don’t we just divide 70 by 4 and instead divide by annuity factor?
Can you please explain sir,
Thank you.It is because the annual payment has to cover the interest as well as the principal.
If we borrow money there are lots of ways it can be repaid. For example, it could just be payment of interest each year and then the whole of the principal paid at the end. Alternatively nothing could be paid each year and then the whole of the interest plus the principal paid at the end.
But however the amount plus interest is repaid, the present value of the repayments will always equal the amount borrowed (the discounting is effectively ‘eliminating’ the interest).
Make up a few repayments yourself and check that what I have written is correct 🙂Here, there is an equal annual amount covering the principal and the interest and the PV of these repayments must be equal to the amount borrowed.
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