AuthorTopic: CFA Question: Loan Payments and Amortization
LaiYanCherng
@2014-10-03 16:15:55
I plan to borrow $50,000 for 5 years at a rate of 9% per annum. I am required to pay off the loan in 5 equal end-of-the-year payments.

Using TI BA-Plus II,

N=5, I/Y=9, PV=-50,000;
CPT -> PMT =$12,854.62(annually)

Using the loan described above, if I'm required to make quarterly payments instead of annually,

N=5x4=20, I/Y=9/4=2.25, PV=-50,000;
CPT -> PMT =$3,123.10(quarterly)..x4 = $12,528.40 (annual)

My question is why annually payment is less than quarterly payment(x4) as shown above?

Isn't it the higher compounding frequency, the higher the effective annual rate which increase the interest charge for quarterly payment?

Kindly please advise. I would appreciate someone can comes up with a technical reason for this.

Thanks
Leo

CFA Discussion Topic: CFA Question: Loan Payments and Amortization

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