 Hey guys, it's MJ the student act tree and we're going to be looking at chapter 9, which is loan schedules in subject Ct1 and How we want to just start this off is we want to realize that there's two ways to calculate Loans the one is Prospectively and the other is retrospectively So prospectively means that you take all the future values and you discount them to get the present value So imagine if you see a timeline over here prospectively means you calculate the value in the beginning at time zero Alternatively, you can calculate your loan retrospectively Which means calculating it right at the end of the timeline and to do that you accumulate the value of the loan and Then you subtract all the accumulated values of the payments made to date and what I mean by Accumulation means it will have that interest component. We built onto it So to give a quick example on how this all works Let's say we have a loan of 50,000 pounds with level monthly payments in arrears And we're going to be doing this for 20 years. Our interest rate is 4% effectively our monthly payments We're using prospective method is we look at the value at the beginning at time zero We have 50,000 of our loan here and remember from our previous chapter on the equation of value We equal this to 12 times our monthly payments and we use the seniority function, which calculates You know the monthly payments we then subtract the two and we will not subtract We take this and we divide it by the 50,000 and that gives us our monthly payment Now we can use the retrospective method to calculate the amount outstanding at the end of the 11th year And what we do in here is we're accumulating The payments and we're working it out to see that of the 11th of the 11th year we've still got 27,000 pounds and a few other and Very quick example. I went through it very quickly if you feel free to pause the video and just go through it yourself I do want to move on to Interest and capital because what we're going to find is every loan payment comprises of an interest component and a capital component and it's very interesting when you draw the size of these amounts on a graph You'll see that it forms a pattern Your interest payment starts off very very small in the beginning and becomes a very large chunk of your payment at the end Whereas your capital is the opposite way around. Oh, no, sorry. Sorry. Sorry. Sorry. I lie The capital component is very small in the beginning and becomes very large at the end Whereas the interest component is very large in the beginning and becomes very small at the end That's because the first payment you make it's basically covering of interest and just a little bit of it is taking away the capital And then your next payment it has slightly less interest because there's been a capital shave Which gives you more to shave the capital off again So let's see how you can calculate this So if you want to know what are the different components of each payment you want to calculate your outstanding loan Immediately after the previous payment Okay, then you can calculate the interest component by just multiplying it by the effective interest rate and Then you can calculate the capital by taking that interest component and subtracting it from the payment And that will give you the calculated the capital component So I've got another little example here Feel free to pause read through and go through it yourself But it's just a follow-on from the previous one on how I've taken the components and I've separated them If you want to calculate the interest and capital Elements on a series of payments then what you can do to get the capital is you calculate the capital repaid by using the following formula the Loan outstanding before the payment minus the loan outstanding after the payment And to calculate the interest you take total payments made minus total capital repaid and that residual would be the interest Again, feel free to pause the video and check out the little example that I've gone through a Nice way to get your head around this whole loan schedule is actually draw up this grid. You can see that my loan starts here This is my repayment. This is my interest component This is my capital component and you can see how the capital component is increasing and the interest component Decreases like I mentioned before and you can see these two values make this value here this value is that value minus that value and Well, just go through it and you'll see it. It all makes intuitive sense and Joe That's just finishing off the example. You can pause and work through that yourself Then there is this other thing flat rates of interest. It's just a very simple type of interest I don't even think it it's examined in the course anymore. So I'm not going to spend too much time going into it But it's basically something that Companies used when they sell stuff they would quote this this annual percentage rate and This is just a formula to convert it back into an effective rate But job that is loan schedules If I went through anything too quickly, please let me know in the comment section and I will give a better explanation there Thanks so much guys for watching and I'm going to make a chapter 10 Which would be on project appraisals right now as well. So stay tuned. Cheers guys