gen-define-amortization-schedules-and-give-one-short-worked-exam-f0c9

Define amortization schedules and give one short worked example.

# Amortization Schedules An **amortization schedule** is a table that shows the breakdown of each periodic loan payment into: - **Principal** (amount reducing the loan balance) - **Interest** (cost of borrowing) - **Remaining balance** after each payment The schedule covers the entire loan term, showing how the loan is gradually paid off. ## Key Features: - Early payments are mostly interest - Later payments are mostly principal - Payment amount typically stays constant (for fixed-rate loans) --- ## Worked Example **Loan Details:** - Principal: $10,000 - Annual interest rate: 6% - Term: 3 years (annual payments) - Payment calculation: $3,741.10 per year **Amortization Schedule:** | Year | Beginning Balance | Payment | Interest (6%) | Principal | Ending Balance | |------|------------------|---------|---------------|-----------|----------------| | 1 | $10,000.00 | $3,741.10 | $600.00 | $3,141.10 | $6,858.90 | | 2 | $6,858.90 | $3,741.10 | $411.53 | $3,329.57 | $3,529.33 | | 3 | $3,529.33 | $3,741.10 | $211.76 | $3,529.34 | $0.00 | **Calculations for Year 1:** - Interest = $10,000 × 0.06 = $600 - Principal = $3,741.10 - $600 = $3,141.10 - New Balance = $10,000 - $3,141.10 = $6,858.90 Notice how interest decreases and principal increases each year as the balance declines.