How to Calculate Investment Amortization Schedules
- 1). Gather all necessary data on the investment. These include purchase price, coupon rate, effective interest rate, the periodic compounding period -- yearly, monthly or at any other interval -- total investment compounding periods and the face value amount.
- 2). Calculate both the periodic effective interest and the cash coupon payment, starting with the first period. Suppose the investment pays 5 percent in coupon rate every year and is a two-year investment, the purchase price on the investment is a discount of $980 to the $1,000 face value and the corresponding prevailing market rate is 6.0923 percent. The effective interest for the first year would be $980 x 6.0923 percent = $59.70 and the coupon payment in cash is $1,000 x 5 percent = $50.
- 3). Apply the interest difference to the discount purchase price. The interest difference between effective interest and cash payment is $59.70 - $50 = $9.70. The difference is added to the discount purchase price of $980 and the result is $9.70 + $980 = $989.70, which is the investment's outstanding value at the end of the first year and would be the principal amount basis for calculating the effective interest of the next period.
- 4). Calculate the effective interest for the second year. Using the investment outstanding value of $989.70, the second year effective interest is $989.70 x 6.0923 percent = $60.30. Note that the cash payment for the second year remains the same at $50.
- 5). Apply the second-year interest difference to the outstanding investment value. The second-year interest difference is $60.30 - $50 = $10.30. Add the difference to the outstanding investment value of $989.70 at the beginning of the period and the result is $10.30 + $989.70 = $1,000. Once the outstanding investment value reaches the face value amount, the amortization is complete.
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