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THE CALCULATIONSTo calculate equal payments: Amount borrowed PV Interest rate I/Y Number of periods N CPT PMT For Differential Interest Problems:FIRST, figure out how the payments are made:INTEREST ONLY WITH A BALLOON:Use stated (original or deal) rate to calculate the annual interest payments.Amount borrowed x stated rate = PMTUse the realistic (current or bank) rate to calculate the PV of the interest payments (PMT) and the PV of the balloon payment (FV).Annual payment PMTBalloon payment FVCurrent rate I/YPeriods NCPT PVAmortize. The answer from step two is the beginning balance. The payments from step one are the total payments. The realistic (current or bank) rate is the interest rate.EQUAL PAYMENTS (there is no balloon payment) If it’s equal payments there is never a FV.Use the stated (original or deal) rate to calculate the payments. See above – to calculate equal payments.Use the realistic (current or bank) rate to calculate the PV of the equal payments (PMT).Equal paymentPMTCurrent rate I/YNumber of periods NCPT PVAmortize. The answer from step two is the beginning balance. The payments from step one are the total payments. The realistic (current or bank) rate is the interest rate.Down payments are subtracted to determine the amount borrowed. Once the PV has been calculated the down payment is added at the end to determine the total cost of the item.NOTE: Interest rates are always given as an annual rate. With monthly payments you must divide by 12. Enter the interest in the calculation as: 8 ÷ 12 = I/Y. When amortizing with monthly payments, calculate the interest as: Principal Balance x 8% ÷ 12.For Bond Problems:For regular bonds with an annual payment and payment of the maturity (face) value at the end of the bond term.JUST LIKE: INTEREST ONLY WITH A BALLOON:Use the coupon rate to calculate the annual interest payments.Maturity Value x coupon rate = PMTUse the current (yield) rate to calculate the PV of the interest payments (PMT) and the PV of the maturity value (FV).Annual payment PMTMaturity Value FVCurrent rate I/YPeriods NCPT PVNOTE: The annual payment for zero coupon bonds is zero.Amortize. The answer from step two is the beginning balance. The payments from step one are the total payments. The current (yield) rate is the interest rate.If the present value is less than the face amount it is a bond discount. If the present value is greater than the face amount it is a bond premium. If the present value is exactly equal to the face amount it is a par bond.For series or serial bonds (bonds that pay a portion of the maturity value with each payment).JUST LIKE: EQUAL PAYMENTS (there is no future value)Use the coupon rate to calculate the payments. See above – to calculate equal payments.Use the current (yield) rate to calculate the PV of the equal payments (PMT).Equal paymentPMTCurrent rate I/YNumber of periods NCPT PVAmortize. The answer from step two is the beginning balance. The payments from step one are the total payments. The current (yield) rate is the interest rate.For Bond journal entries:When issuing a bond:The present value is the debit to Cash. The maturity value is the credit to Bonds Payable. You know whether it is a discount or premium bond. Make the journal entry balance with a debit (or credit) to Bond Discount (or Bond Premium).For the annual payment:Use the numbers from the amortization schedule. See below:PaymentInterestPrincipalBalanceThis is the This is the This is the debit or credit toCredit to CashDebit to Int Expbond premium or bond discount. Make thejournal entry balance. ................
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