• August 20th, 2011
  • Posted by athanne

Debt Amortization in Business Mathematics

Incurring a debt and making a series of payments to slim this debt to none in Business Mathematics is something all human beings must do in their lifetime because as human beings we make purchases. For any purchase to be feasible, one must be given sufficient time to complete the transaction by paying down the amount owed in full. Business Training in Kenya has more articles. This in Business Mathematics is referred to as ‘amortizing’ a debt. The term ‘amortize’ comes from a French word ‘amortir’ which means the act of killing something.

 Basics Required in Business Mathematics

For someone to understand the basic concept of debt amortization in Business Mathematics, the following definitions are key: -

  • Principal – this in Business Mathematics is the initial amount of the debt, usually the price of the item involved in the transaction.
  • Interest Rate – this in Business Mathematics is the amount above the actual debt that one must pay for employing someone else’s money. Interest rate is usually expressed as a percentage to allow for it to be viable for any period of time.
  • Time limit – this in Business Mathematics is essentially the period of time that will be needed to pay down (eliminate/amortize) the debt. It is expressed in years as this is the best format understood by a majority. The number of and interval of payments, e.g. 24 monthly payments are known as installments.

 

Interest Calculation in Business Mathematics

Simple interest in Business Mathematics is calculated using the following formula;
Interest = Principal × Rate × Time;

I = P×R×T.

E.g. Peter decides to buy a vehicle. The car dealer gives him the price and tells him he can pay with time as long as he makes 24 monthly installments. He also agrees to pay interest at a rate of 6%.

Solution;

The price of the car is 720,000/=, taxes included.

2 years or 24 equal monthly payments to pay out the debt.

An interest rate of 6%

468x60 10 Debt Amortization in Business Mathematics

468x60 10 Debt Amortization in Business Mathematics
Business Mathematics1 Debt Amortization in Business Mathematics

Business Mathematics

Note:

  • The first payment should be made 30 days after receiving the loan/incurring the debt. A simple timeline will give one an idea of the question we need to address.
  •  The monthly payment/installment must include at least 1/24th of the principal (original debt) so that one can pay off the principal.
  • The monthly payment/installment will also include the interest component that is equal to 1/24 of the total interest.
  • The total interest is to be calculated by looking at a series of changing amounts at a fixed rate of interest.

From the formula I = PRT;

I = 720000 × (6/100) × 2 = 86400.

To amortize a debt, one does not only pay the interest but also the principal amount. In this case;

Amount = principal + interest

A = 720000 + 86400 = 806400.

For Business Mathematics, by totaling the amount of interest and calculating the mean, you can arrive at a simple approximation of the payment required to kill this debt. The average value will differ from exact value since one is paying less than the actual calculated value of interest for the early payments, which would change the value of the outstanding balance and therefore the value of interest calculated for the next installment.

Conclusion on Business Mathematics

Understanding the simple effect of the interest rate on an amount in terms of a given period of time and realizing that amortization/killing of the debt is nothing more than just a progressive summary many, simple, monthly debt calculations in Business Mathematics should equip a person with a better understanding of mortgages and loans. The mathematics is both simple and complex in that calculating the periodic interest to be paid is simple but finding the accurate periodic payment to amortize/kill the debt is complex in Business Mathematics.

Incoming search terms: