Question

In 250 words or words, describe amoratization formula/calculations?

Answer 1

Amortization can be defined as the process of reducing the asset 's value or the balance of a loan by a periodic amount, usually monthly. Every time when you make a payment on a loan then are paying certain amount of interest also along with a part of the principal. The principal is the original loan amount, or the balance that have to be paid off. With regular periodic payments, the principal gradually reduces, and eventually reaches zero, thus indicating that debt is completely paid off. When high amount of principal is repaid, less interest is due on the principal balance. Whenever possible, it is beneficial to make extra payments to decrease the principal amount of the loan faster. The faster you’re able to decrease principal, the less total interest need to be paid over the term of the loan.

Amortization can be computed as below. The calculation used to know the periodic payment amount makes an assumption that the first payment is not due on the first day of the loan, however one full payment period into the loan. To calculate amortization, the principal amount and the interest rate are required. Also the term of the loan and the payment amount each period should be known. The formula for computing the payment amount is.

A = r (1+r)^n / [(1+r)^n - 1]; where

A = amount of payment per period;

P = initial Principal amount of loan

r = interest rate per period

n = total number of periods or payments