Question

A borrower gets a fully amortizing constant amortization mortgage (CAM) for $200,000 at 12% annual interest rate for 15 years with monthly repayments.

1. Compute the loan repayments, principal amortizations, and interest payments for the first 6 months.

2. Redo the same calculations assuming the loan is a fully amortizing CPM, all else the same.

3. Which of the two amortization structures (CAM or CPM) would be riskier for the lender?

4. Which the two loan structures would provide a higher effective yield to the lender?

Answer 1

THE CALCULATIONS CAN BE DONE ON EXCEL AS FOLLOWS:

NOMINAL(0.12,12)=0.1138

1. PRINCIPAL=200000/180=1111.1111

INTEREST=(0.1138/12)*(200000-(PERIOD OF LOAN PAYMENT-1)*PRINCIPAL)

MONTH	PRINCIPAL	INTEREST	PAYMENTS
1	1111.11111	1896.667	3007.7778
2	1111.11111	1886.13	2997.2407
3	1111.11111	1875.593	2986.7037
4	1111.11111	1865.056	2976.1667
5	1111.11111	1854.519	2965.6296
6	1111.11111	1843.981	2955.0926

2.

TOTAL MONTHLY PAYMENT=PMT(0.1138/12,15*12,200000,0,0)=2321.97

PRINCIPAL PAYMENT FOR MONTH 1=PPMT(0.1138/12,1,180,200000,0,0)

INTEREST PAYMENT FOR MONTH 1=IPMT(0.1138/12,1,180,200000,0,0)

THE FOLLOWINF TABLE GIVES THE ANSWERS:

MONTH	PRINCIPAL	INTEREST	PAYMENTS
1	₹ -424.22	₹ -1,897.76	₹ -2,321.97
2	₹ -428.24	₹ -1,893.73	₹ -2,321.97
3	₹ -432.30	₹ -1,889.67	₹ -2,321.97
4	₹ -436.41	₹ -1,885.57	₹ -2,321.97
5	₹ -440.55	₹ -1,881.43	₹ -2,321.97
6	₹ -444.73	₹ -1,877.25	₹ -2,321.97

3.

THE SECOND STRUCTURE IS RISKIER FOR LENDER AS PAYMENTS DECREASE.

4.

THE SECOND STRUCTURE PROVIDES A HIGHER EFFECTIVE YIELD TO THE LENDER.