Amortization

 Getting everyone in the mood for tomorrow's Bank of Canada

rate announcement, a little look at amortization ie paying off a

loan in equal instalments, over a given period. Because that is the

mystery of the formula.

Let us say that I borrow 100 for 5 years, and agree to pay back 20$

every year. That works. But then I am charged 5% annual interest.

In effect, I would need to pay back 25 tat the end of the fist year,

24 for the second, 23 the thirs, 22 the fourth and 21 the fifth. But

I would really appreciate making 5 equal payments; now what.

Tada, the amortization formula:

Moving things around:

A*((1+r)^5 - A = P* r*(1 + r)^5

In effect, the money the Bank makes on the right is the same as the cost to me

on the left. 

Below, using the online calculator:

                                                                       

I need to make 5 payments of  23.10$ !

A demain!!

Amortization Calculation Formula and Payment Calculator (vertex42.com)

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