Example 9 - Loan & Random Extra Payment

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 loan or mortgage with one extra, principal only, payment. Regular periodic payments.

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. Enter 7.25% for the "Nominal Annual Rate".
2. Create a "Loan" event in row one of the cash flow input area.

1. 1. Set the "Date" to July 1, 2004 (07/01/2004)
   2. Set the "Amount" to $32,500.00
   3. Set the "# Periods" to 1.

3. 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 typical car loan payable over four years. Initially, the regular payment amount is unknown.

1. 1. A) Set the "Date" to August 1, 2004 (08/01/2004)
   2. B) Set the "Amount" to "Unknown"
   3. C) Set the "# Periods" to 48.

3. 5) Calculate the unknown. The result is $782.03
4. 6) Next, to prepare to enter the extra payment, the payments in the cash flow screen need to be expanded. To "Expand" the payments, do any one of these three things:

1. • ? Click on the {Edit} menu choice and select {Expand}; or
   • ? Press Ctrl-E; or
   • ? Click on the "Expand" button on the button bar. You should now have a total of 49 rows made up of one loan row and 48 payment rows.

3. 7) Assume that you receive a bonus in 2005 and that you want to make an extra principal payment on January 1, 2006. Select row 20 by clicking on the number 20 in the left most column. This should be the row with a payment date of February 1, 2006. Insert a new row at this point by doing any one of these three things:

1. 1. ? Click on the "Insert" button on the button bar. This will create a new payment row with a payment date set to February 1, 2006 and a payment amount of 0.00.
   2. A) Change the date in this new row to January 1, 2006. The reason we had you select row 20 above is because we want the extra payment to be credited AFTER the regular payment paid on January 1, 2006, and when inserting a row, the new row is inserted before the selected row. Or in this case, before February 1 and after January 1.
   3. B) Next, change the "Amount" to $5,000.00. This creates the "extra payment".
   4. C) Sort the payments. (Sort is the opposite of "Expand") Click on the "Sort" button on the button bar.

You should now have a total of four rows made up of one loan row, 18 regular payment rows of $782.03, the extra payment row, and 30 more regular payment rows.

The point of making an extra payment is to save interest expense, which in turn, shortens the term of the loan. Let's see how the extra payment impact this specific loan..

Our extra payment will make it so the final payment will have to be an irregular amount. We need to tell C-Value! how to handle this irregular amount. We do this by setting the rounding option:

3. Click on the "Rounding" button on the toolbar. The "Rounding Window" will open. We suggest you consider one of two options:

1. • If you want the final payment to be less than the regular payment amount, select "Balloon (create an additional payment)".
   • Or if you don't mind the final payment being larger than the regular scheduled payment amount (but less than the amount of two regular payments), you may select "Last Payment" on the "Rounding Window".
2. 1. B) Make your selection and click the [OK] button to close the rounding window.

3. 9) In the fourth row, change the "# Periods" of payments to "Unknown".
4. 10) Calculate the unknown.

1. • If you had selected Balloon..." as the rounding option in step 8(A) above, the final payment will occur at payment number 42 (rather than the original number of payments 48) and the payment amount will be $383.18, or;
   • ? if you had selected "Last Payment" as the rounding option, the final payment will occur at payment number 41 and the payment amount will be $1,162.91.

3. 11) And, as usual, if you want to see a detailed amortization schedule showing how the monthly payment is allocated between principal and interest as well as the impact of the "extra payment" amount, click on the "Amortization" tab above the input area

Back to the online Time Value of Money Calculator.