Sharp EL733A EL-733A Operation Manual - Page 40

4.

Calculate

the

remaining

balance

on

the

loan

(FV)

at

the

next

time

the

interest

can

increase,

again

assuming

the

maximum

increase.

5.

Re

-amortize

the

loan

for

the

remaining

term,

using

the

balance

calculated

in

step

4

as

the

present

value

(PV)

and

using

the

increased

interest

rate.

6.

Repeat

steps

4

and

5

until

you

reach

the

ceiling

on

the

interest

rate

or

until

the

end

of

the

loan.

Example:

A

$28

.

000.00,

15

year

loan

is

written

on

a

variable

rate

contract

with

the

rates

tied

to

the

T

-bill.

The

current

interest

rate

on

the

contract

is

12%

APR

and

the

interest

rate

ceiling

is

16%

APR.

The

interest

rate

is

re-evaluated

every

12

months

of

the

contract

and

it

can

increase

by

a

maximum

of

1%

APR

at

each

re-evaluation.

Payments

are

monthly

and

in

advance,

and

compounding

is

monthly.

At

the

end

of

the

15

year

term,

an

$8

1

000

balloon

payment

is

due.

What

is

the

worse

case

payment

schedule?

Solution:

First

look

at

the

cash

-flow

schedule

for

the

loan

assuming

the

fi

rst

interest

rate

stays

constant:

t

PMT

i

t

3

1111

PMT

=

—28'000

FV

=

8'000

117t7t171

1

17;1

1

17t7t

BD

i=12-12=1

n

=15

X

12

This

cash

-flow

schedule

is

drawn

from

the

perspective

of

the

lender.

To

the

lender,

the

money

loaned

out

is

a

negative

cash

-flow

and

the

payments

are

positive

cash

-flows.

The

problem

states

that

the

payments

are

in

advance,

which

means

the

calculator

must

be

set

to

BGN

mode.

Press

1

to

turn

the

BGN

indicator

on

in

the

display.

Then,

the

keystrokes

to

calculate

payment

for

the

fi

rst

12

months

are:

(Mode:

FIN)

2R000

8'000

0

M

15

2ndn

pa21

OF)

t+/-1

PV

Result:

316.86

That

was

easy.

However,

this

$316.86

payment

applies

to

the

fi

rst

12

months

only.

In

the

worst

case,

the

interest

rate

will

jump

1%

at

the

end

of

those

12

months.

Calculating

the

payment

when

the

interest

changes

is

li

ke

writing

a

new

loan

for

a

smaller

balance

and

a

shorter

term

(14

years).

To

calculate

the

smaller

balance

(after

1

year)

press:

12

Ell

M

Result:

27'492.27

This

is

amortized

out

for

a

term

of

only

14

years

at

the

new

interest

rate

of

13%.

Don't

forget

to

rekey

the

$R000

balloon

payment

at

the

end:

1

4-

1-1

Pv

8'000

[1]

27

Sharp EL733A EL-733A Operation Manual - Page 40

Sharp EL733A Manual

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