Page 75 - CFA - Day 1 & 2 Course Notes

LOS 6.f: Demonstrate the use of a Session Unit 2: The Time Value of Money
time line in modelling and solving

time value of money problems..

Example: Principal and interest component of a specific loan payment
Suppose you borrowed $10,000 at 10% interest to be paid semi-annually over ten years.

Calculate the amount of the outstanding balance for the loan after the second payment is made.

Answer: First, the amount of the payment must be determined by entering the relevant

information and computing the payment.

PV = –$10,000; I/Y = 10 / 2 = 5; N = 10 × 2 = 20; CPT → PMT = $802.43

The principal and interest component of the second payment can be determined using

the following process:

Payment 1: Interest = ($10,000)(0.05) = $500
Principal = $802.43 – $500 = $302.43
Payment 2: Interest = ($10,000 – $302.43)(0.05) = $484.88

Principal = $802.43 – $484.88 = $317.55
Remaining balance = $10,000 – $302.43 – $317.55 = $9,380.02