Annuity is a type of repayment, which is constant over the time. Th annuity payment consists of two parts – the interest and the amortization. The ratio of the interest to amortization is gradually decreasing.
To calculate the annuity we use the following formula:
S – annuity repayment
U – borrowed sum of money
q – q = 1 + interest_rate_per_time_period
n – number of time periods (time)
U – borrowed sum of money
q – q = 1 + interest_rate_per_time_period
n – number of time periods (time)
Example
We borrow 200 000$ in the bank for 5 years, payable monthly, with interest rate per year. Find the monthly annuity payment.
Number of periods (months):
We pay per month (we have to divide the annual interest rate):
We substitute into the formula:
We pay per month (we have to divide the annual interest rate):
We substitute into the formula:
We will pay 4758$ per month.