Lecture no13 debt management

Debt Management
Lecture No. 13
Chapter 4
Contemporary Engineering Economics
Copyright © 2016

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Credit Card Debt Management
Credit card debt and commercial
loans are among the most significant
financial transactions involving
interest.

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Example 4.14: Loan Balance, Principal, and Interest

 Given:

o P = $5,000,
o i = 12% APR,
o N = 24 months
 Find: A

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Solution

 Monthly Payment:
A = $5,000(A/P, 1%, 24)
= $235.37

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Calculating the Remaining Loan Balance after Making the nth
Payment

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Example 4.15: Loan Balance at End of Period 6

Given: P = $5,000, i = 12% APR,
N = 24 months

 Find: Loan balance, principal,
and interest payment for the 6

th

payment

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Solution




Monthly payment: $235.37
Interest payment at n = 6

•

Loan balance at the end of n = 5, or
beginning of n = 6

B5 = $235.37(P / A,1%,19)

•

= $4,054.44
Interest
payment

I6 = ∃4,054.49(0.01)

•

= ∃40.54

Principal payment

P6 = $235.37 − $40.54
= $194.83
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Example 4.17: Financing Your Vehicle

Given:
• Three financing options
• r = 4.5%
• Payment period = monthly
• Compounding period = monthly
 Find: Which option is best?

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Solution

•Option A: Conventional Debt Financing:

Pdebt = $4,500 + $736.53(P/A, 4.5%/12, 42)
− $17,817(P/F, 4.5%/12, 42)

= $17,847

•Option B: Cash Financing

Pcash = $31,020 − $17,817(P/F,4.5%/12,42)
= $15,845

•Option C: Lease Financing
42)

Please = $1,507.76 + $513.76(P/A, 4.5%/12,
+ $395(P/F, 4.5%/12, 42)
= $21,336

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Home Mortgage

Types of Home Mortgages

The Cost of a Mortgage

Fixed-rate mortgage

Loan amount

Adjustable-rate mortgage

Loan term

Hybrid mortgage

Payment frequency
Points (prepaid interest)
Fees
Types of mortgages

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Example 4.16: An Interest-Only Versus a Fully Amortized Mortgage

 Given:
• P = $200,000,
• APR = 6.6% or 0.55% per month, and
• N = 30 years

 Find: (a) monthly payment; (b) interest payments during the first year of
ownership of the home.

• Option 1: A fully amortized payment option.
• Option 2: A five-year interest-only option.

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Solution

• (a) Monthly payments

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Solution

• (b) Interest payments

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Calculating the Monthly Payments with an Adjustable-Rate Mortgage
(ARMs)

• Index: a guide that lenders use to measure interest rate changes
• Margin: an interest rate that represents the lender’s cost of doing business plus the profit
• Adjustment period: the period between potential interest rate adjustments (e.g., 3/1 means your
interest rate is fixed for the first 3 years, then could be adjusted every year thereafter)

• Interest rate cap: a limit on the amount your interest can change (a periodic cap and a lifetime cap)
• Payment cap: how much your monthly payment can increase at each adjustment

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Example 4.18: A 5/1 Hybrid Adjustable Mortgage Plan

 Given: Varying annual mortgage rates and N = 30 years

 Find: (a) the monthly payment; (b) the total interest payments over the 10-year

ownership

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Solution

• (a) Monthly payments under a 5/1 hybrid mortgage
A1−60 = $100,000(A/ P,0.5017%,360) = $600.84
A60−72 = $93,074(A/ P,0.5375%,300) = $625.54
A73−84 = $91,526(A/ P,0.5500%,288) = $634.03

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(b) Total Interest Payment over 10 Years

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