Читать книгу Fundamentals of Financial Instruments - Sunil K. Parameswaran - Страница 122

Michael has borrowed $8,000 from a bank for a year. The bank charges simple interest at the rate of 10% per annum. If the loan is repaid in one lump sum at the end of the year, the amount payable will be:

This consists of $8,000 by way of principal repayment and an interest payment of $800.

Now let us consider a case where Michael repays the principal in two equal semiannual installments. For the first six months, interest will be computed on the entire principal. So the first installment will be:

The second installment will be lower, for it will include interest only on the remaining principal, which in this case is $4,000. So the amount repayable will be:

The sum of the two payments is $8,600. In the first case the interest payable was $800, whereas in the second case it is only $600. Quite obviously, the more frequently principal is repaid, the lower will be the amount of interest.