We take a 10-year mortgage for $300,000 at 7.75% p.a. It is to be repaid in monthly repayments. (a)What is the repayment amount? Assume that interest is compounded monthly. Which formula should you use to solve this problem? (b) What is the balance outstanding after two years? How much principal and how much interest have been paid? (c) After two years, the interest rate falls to 7.25% p.a. What prepayment penalty would make it unattractive to prepay the loan?

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Amortized Loans

The term "amortization" refers to spreading the value of a loan or a debt over a series of regular payments or installments comprising of both the principal and interest amount. It generally involves the process where in the value of a loan or an intangible asset is written down over its maturity period.