## CALCULATING THE PAYMENT AMOUNT

Spreadsheets and online calculators handle this calculation very nicely. This section, deriving the formula, can be skipped if you wish.

If R is the annual interest rate and y is the number of payments per year, which we’re assuming is the same as the number of compounding intervals per year, then

is the interest per payment period. As a notational convenience, let

R

I — 1 + .

y

The balance at the time of taking the loan, that is, after 0 payment periods, is just the principal. If we let Bn be the balance after the nth payment, then if P is the principal:

Bo — P.

The balance after the first payment period is just the principal plus the interest accrued during this period minus the payment (S):

Bi — P + PR- S — P|1 + R |-S — Pi – S.

У V y)

This relationship is recursive...

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