Example 13 - Irregular Length 1st Period

This example applies to our online demo Time Value of Money Calculator. The C-Value! program for Windows works in a similar way and has a few more features. Note, our online demo TVM calculator is limited to calculations using interest rates between 4.0% and 5.99%

Note:This topic has not been proofed and images need to be added. However, we believe that the steps are complete and accurate.

Conventional mortgage with an unknown payment amount, an odd length initial first period and thereafter regularly scheduled payment periods.

1. Click the [New] button to clear any previous entries.
2. Set "Rounding" to "Ignore" by either:

• clicking on the "Rounding" button on the toolbar;
• clicking on the {Compute} menu choice and select {Rounding...};

1. Background: By convention, in the US, mortgage payments are typically due on the first of each month. However, the monies for a loan can and will be advanced to the borrower any day of the month. So, if a real estate transaction closes on say July 15, 2004 then the first payment is often not due until September 1, 2004. This creates an odd length first period – specifically a "long first period". The effect of this is that more interest is due the lender. This "extra" interest due to the initial odd days can be collected in one of three ways as described in this example
2. For greater detail about how values are entered into C-Value!, please see "Example 1 - conventional mortgage or loan"
3. 1) Set compounding to "Monthly"
4. 2) Enter 6.5% for the "Nominal Annual Rate"
5. 3) Create a "Loan" event in row one of the cash flow input area
6. A) Set the "Date" to July 15, 2004 (07/15/2004)
7. B) Set the "Amount" to 425,000.00
8. C) Set the "# Periods" to 1
9. 4) Move to the second row of the cash flow input area. Select "Payment" for the "Event" type. For this example, we will assume we want to create a schedule for a 30-year mortgage (360 monthly payments)
10. A) Set the "Date" to September 1, 2004 (09/01/2004)
11. B) Set the "Amount" to "Unknown" by typing "U"
12. C) Set the "# Periods" to 360
13. 5) Tell C-Value! how to handle the "Odd Day Interest". In this example, the odd day interest is the interest, which is due the lender for the period from 07/15/04 to 08/01/04. Click in the first row under the "Series" column. This opens the "Points and Fees for APR Calculations" window which also includes options for "Prepaid Interest" as well as the "Initial Odd Day Interest"
14. ? If the "Odd Day Interest" is to be paid with the "Origination Date" of the loan (the day the monies are advanced – July 15th in this case) then click on "Initial odd day's or prepaid interest paid with loan origination." or
15. ? If the "Odd Day Interest" is to be paid along with the first payment then click on "Initial odd day's or prepaid interest paid with first payment." or
16. ? If the "Odd Day Interest" is to be added to the amount of the loan and amortized with the original principal amount, then make sure neither of the above checkboxes are checked and that the prepaid interest is set to "0".
17. Click the [OK] button to close the Window
18. 6) Calculate the unknown
19. ? The result is $2,686.29 if you've selected to pay the odd days interest on either the loan origination date or along with the first payment; or
20. ? The result is $2,694.53 if the odd days interest is being amortized with the loan.
21. 7) If you want to see a detailed amortization schedule showing how the monthly payment is allocated between principal and interest, click on the "Amortization" tab above the input area.
22. Notice: If the odd days interest is paid on the origination date of the loan, that July 15 shows a payment being made for $1,304.58. This payment is for the interest due from July 15th to August 1st. If the option, pay odd day interest with the first payment is selected, then the $1,304.58 is added to the regular payment of $2,686.29 and the first payment is $3,990.87. When neither odd day interest option is selected, then every payment is slightly larger and they all are for the same amount (except for possibly the last payment). The odd days interest has, in affect, become part of the loan amount

Back to the online Time Value of Money Calculator.