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# Fixed Rate and Fixed Duration Loans

Fixed Rate and Fixed Duration Loans. You need to know three things about a fixed rate, fixed duration loan: How much do you need to borrow? What is the annual interest rate? In what amount of time do you need to pay back the loan?. Example: You get a \$14,000 loan for a new car

## Fixed Rate and Fixed Duration Loans

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### Presentation Transcript

1. Fixed Rate and Fixed Duration Loans • You need to know three things about a fixed rate, fixed duration loan: • How much do you need to borrow? • What is the annual interest rate? • In what amount of time do you need to pay back the loan?

2. Example: • You get a \$14,000 loan for a new car • The annual interest rate is 4.9% • You need to pay back the loan in six years (72 months)

3. Step 1: Set up an amortization table We want to pay back the loan in 6 years = 72 months, so the column A should go from 0 to 72.

4. Step 2: Enter the amount you borrow (\$14,000) into the “End Balance” column of month

5. Step 3: Tell Excel to use the “End Balance” of the previous month as the “Beg Balance” of the next moth.

6. Step 4: Use the PMT function to calculate your monthly payment. PMT takes three numbers, separated by commas: Fist number: 0.049/12 is the annual percentage rate divided by the number of payments per year. We are calculating monthly payments, so we divide by 12. Second number: 72 is the total number of payments until the loan should be paid off. In this case it’s 72 because there are 72 months in six years Third number: 14000 is the total amount we borrow. By default PMT will give you a negative number. To make it positive you can put a “-” in front of PMT.

7. Step 4 alternative: Instead of typing the PMT function directly into a cell, you can also use a pop-up form. Type “=-“ then click on the “Insert Function” button: Then fill in Rate, Nper, and Pv in the form that pops up. (Leave Fv and Type blank.)

8. Step 5: Calculate the interest for the month Interest in Dollars = (Beg Balance) x (annual percentage rate) / 12

9. Step 6: Calculate how much of your payment is left over after you pay the interest. (\$224.82) is a negative number because it’s money you pay, not money you get, so to calculate how much of your payment go

10. Step 7: Subtract what is left over after you pay the interest from what you owed at the beginning of the month. This is your new balance at the beginning of the next month. You have already set up the transfer of this balance to the beginning of the next month in step 3.

11. Step 8: Fill in the amortization table: Highlight B3 through F3. Double-click on the fill handle of F3.

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