A piece of collateral that has more than one debt claim to it will have senior debt and subordinate debt. The calculation and amortization of senior debt is the same as subordinate debt. The calculation will tell the person how much they owe on the debt. The amortization will break down this payment between principal payments and interest payments on the debt. For example, a person has a senior debt of $100,000 with an interest rate of six percent. The person has 25 years to repay the loan with monthly payments.
Difficulty: Moderately Easy Instructions
- Step 1
Divide the interest rate by 12 to determine the interest rate per month and then multiply the number of years of repayment by 12 to calculate the number of payments. In the example, six percent divided by 12 months equals 0.005. Then, 25 years times 12 months equals 300 payments.
- Step 2
Multiply the interest rate per month by the amount borrowed. In the example, 0.005 times $100,000 equals $500. This is the numerator of the formula.
- Step 3
Add one to the interest rate per month and raise the sum to the negative power of the amount of loan payments. In the example, 1 plus 0.005 equals 1.005, then 1.005 raised to the power of -300 equals 0.22396568.
- Step 4
Subtract the number calculated in Step 3 from 1. In the example, 1 minus 0.22396568 equals 0.77603432. This is the denominator of the formula.
- Step 5
Divide the numerator from Step 2 by the denominator from Step 4. In the example, $500 divided by 0.77603432 equals $644.31 of monthly payments.
- Step 1
Multiply the capital remaining on the loan by the interest rate per month. For the first month, the capital remaining on the loan is the amount borrowed. In the example, 0.005 times $100,000 equals $500. This is the interest payment.
- Step 2
Subtract the interest payment from the monthly payment. This calculates the principal payment. In the example, $644.31 minus $500 equals $144.31.
- Step 3
Subtract the principal payment from the remaining capital. This calculates the new remaining capital. In the example, $100,000 minus $144.31 equals $99,855.66
- Step 4
Repeat the steps for each monthly payment.
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