MATH 2FM3 Lecture Notes - Lecture 13: Accrued Interest, Discounting

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3. 1 the amortization method of loan repayment: suppose a loan l is taken at time 0 and is to be repaid with payments of amounts. K1, k2, kn at times 1, 2, , n. if the interest rate per period is i, the equation value at time 0 for this loan is. L = k1 + k2 2 + + kn n, with = 1. Ob1 = l(1 + i) k1 = l (k1 l i), with l i being the accrued interest on the original principal for rst period; k1 is the. Rst payment so the remainder k1 l i ( rst payment minus accrued interest also called principal repaid) is applied to reduce principal; let us denote ob0 = l and. I1 = ob0 i, p r1 = k1 i1, then. Ob1 = ob0 (k1 i1) = ob0 p r1. This algorithm can be extended to the next periods:

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