FINANCIAL

MATHEMATICS
Prof. Dr. Hakan AYGÖREN

6.Hafta
 LOAN AMORTIZATION
What is the Loan Amortization?

• Loan Amortization is a loan with scheduled periodic payments that

consist of both principal and interest.
• An amortized loan payment pays the relevant interest expense for the
period before any principal is paid and reduced.
• The most common examples of an amortized loan are auto loans,
home loans (mortgages) and personal loans from a bank for small
projects or debt consolidation.
Relationship Between Principal and Interest
• Because interest is calculated based on the most recent ending
balance of the loan, the interest portion of the loan payment
decreases as payments are made.
• This is because any payment in excess of the interest amount
contributes to reducing the principal, and this reduces the balance in
which interest is calculated.
• As the interest portion of an amortization loan decreases, the
principal portion of the payment increases. Therefore, interest and
principal have an inverse relationship within the payments over the
life of the amortized loan.
A Common Problem in your life
• Suppose that you need to buy a car, but you don't have enough
money to fully pay in cash. The only way you can buy is to take out a
car loan. Given the amount of the car, the current interest rate, and
the numbers of period you have to pay for the car,
• How can you determine if you can afford to pay for monthly payment
of the loan?
• What is the interest payment schedule behaviour of your loan?
• What is the principal payment schedule behaviour of your loan?
 LOAN AMORTIZATION
• A loan of 30 000 is to be amortized by equal payments at the end of
each year for 5 years, if the interest is calculated at the rate of 6% per
annum compounded annually, find annual payment and the total
interest paid.

• CF = 7121.89 (Annual Payment)

 Beginnig Interest payment Ending balance of the
Principal Payment
Year balance of CF (Debt x Interest loan
(CF – Interest Payment)
the loan Rate) (Debt - Principal)

1 30000 7121.89 30000 x 0.06 = 7121.89 – 1800 = 30000 – 5321.89 =

1800 5321.89 24678.11
24678.11 x 0.06 7121.89 - 1480.69 = 24678.11 - 5641.204 =
2 24678.11 7121.89 = 1480.69 5641.204 19036.90
19036.90 - 5979.67 =
3 19036.90 7121.89 19036.90 x 0.06 7121.89 - 1142.21 = 13057.22
= 1142.21 5979.67

4 13057.22 7121.89 13057.22 x 0.06 7121.89 - 783.43 = 13057.22 - 6338.46 =

= 783.43 6338.46 6718.76
5 6718.76 7121.89 6718.76 x 0.06 = 7121.89 - 403.13 = 6718.76 - 6718.76 = 0
403.13 6718.76
Total Interest payment = 5609.46
INTEREST RATE % 1,21
NUMBER OF EQUAL PAYMENT 12
Beginnig Ending
balance of Monthly Interest Principal balance of
Date the loan Payment Payment payment the loan
Dönem Başı Anapara Kalan
Tarih Borç AylıkÖdeme FaizÖdemesi ödemesi Anapara
0 15.11.2016 0 0 0 10000
1 15.12.2016 10000 900 121 779 9221
2 15.01.2017 9221 900 112 789 8432
3 15.02.2017 8432 900 102 798 7634
4 15.03.2017 7634 900 92 808 6826
5 15.04.2017 6826 900 83 818 6008
6 15.05.2017 6008 900 73 828 5180
7 15.06.2017 5180 900 63 838 4342
8 15.07.2017 4342 900 53 848 3495
9 15.08.2017 3495 900 42 858 2637
10 15.09.2017 2637 900 32 868 1768
11 15.10.2017 1768 900 21 879 889
12 15.11.2017 889 900 10 890 0
 Loan Amortization Table
1000
800
600
400
200
0
1 2 3 4 5 6 7 8 9 10 11 12
Series1 Series2
 % 1,25
Tarih Dönem Başı Taksit faiz ödemesi Anapara ödemesi Dönem Sonu Bakiye
0 15.11.2016 0.00 TL 0.00 TL 0.00 TL 50,000.00 TL
1 15.12.2016 50,000.00 TL 1,733.26 TL 625.00 TL 1,108.26 TL 48,891.74 TL
2 15.01.2017 48,891.74 TL 1,733.26 TL 611.15 TL 1,122.11 TL 47,769.63 TL
3 15.02.2017 47,769.63 TL 1,733.26 TL 597.12 TL 1,136.14 TL 46,633.49 TL
4 15.03.2017 46,633.49 TL 1,733.26 TL 582.92 TL 1,150.34 TL 45,483.15 TL
5 15.04.2017 45,483.15 TL 1,733.26 TL 568.54 TL 1,164.72 TL 44,318.42 TL
6 15.05.2017 44,318.42 TL 1,733.26 TL 553.98 TL 1,179.28 TL 43,139.15 TL
7 15.06.2017 43,139.15 TL 1,733.26 TL 539.24 TL 1,194.02 TL 41,945.12 TL
8 15.07.2017 41,945.12 TL 1,733.26 TL 524.31 TL 1,208.95 TL 40,736.18 TL
9 15.08.2017 40,736.18 TL 1,733.26 TL 509.20 TL 1,224.06 TL 39,512.12 TL
10 15.09.2017 39,512.12 TL 1,733.26 TL 493.90 TL 1,239.36 TL 38,272.76 TL
11 15.10.2017 38,272.76 TL 1,733.26 TL 478.41 TL 1,254.85 TL 37,017.91 TL
12 15.11.2017 37,017.91 TL 1,733.26 TL 462.72 TL 1,270.54 TL 35,747.38 TL
13 15.12.2017 35,747.38 TL 1,733.26 TL 446.84 TL 1,286.42 TL 34,460.96 TL
14 15.01.2018 34,460.96 TL 1,733.26 TL 430.76 TL 1,302.50 TL 33,158.46 TL
15 15.02.2018 33,158.46 TL 1,733.26 TL 414.48 TL 1,318.78 TL 31,839.68 TL
16 15.03.2018 31,839.68 TL 1,733.26 TL 398.00 TL 1,335.26 TL 30,504.42 TL
17 15.04.2018 30,504.42 TL 1,733.26 TL 381.31 TL 1,351.95 TL 29,152.46 TL
18 15.05.2018 29,152.46 TL 1,733.26 TL 364.41 TL 1,368.85 TL 27,783.61 TL
19 15.06.2018 27,783.61 TL 1,733.26 TL 347.30 TL 1,385.96 TL 26,397.64 TL
20 15.07.2018 26,397.64 TL 1,733.26 TL 329.97 TL 1,403.29 TL 24,994.35 TL
21 15.08.2018 24,994.35 TL 1,733.26 TL 312.43 TL 1,420.83 TL 23,573.52 TL
22 15.09.2018 23,573.52 TL 1,733.26 TL 294.67 TL 1,438.59 TL 22,134.93 TL
23 15.10.2018 22,134.93 TL 1,733.26 TL 276.69 TL 1,456.57 TL 20,678.36 TL
24 15.11.2018 20,678.36 TL 1,733.26 TL 258.48 TL 1,474.78 TL 19,203.58 TL
25 15.12.2018 19,203.58 TL 1,733.26 TL 240.04 TL 1,493.22 TL 17,710.36 TL
26 15.01.2019 17,710.36 TL 1,733.26 TL 221.38 TL 1,511.88 TL 16,198.48 TL
27 15.02.2019 16,198.48 TL 1,733.26 TL 202.48 TL 1,530.78 TL 14,667.70 TL
28 15.03.2019 14,667.70 TL 1,733.26 TL 183.35 TL 1,549.91 TL 13,117.79 TL
29 15.04.2019 13,117.79 TL 1,733.26 TL 163.97 TL 1,569.29 TL 11,548.50 TL
30 15.05.2019 11,548.50 TL 1,733.26 TL 144.36 TL 1,588.90 TL 9,959.60 TL
31 15.06.2019 9,959.60 TL 1,733.26 TL 124.49 TL 1,608.77 TL 8,350.83 TL
32 15.07.2019 8,350.83 TL 1,733.26 TL 104.39 TL 1,628.87 TL 6,721.96 TL
33 15.08.2019 6,721.96 TL 1,733.26 TL 84.02 TL 1,649.24 TL 5,072.72 TL
34 15.09.2019 5,072.72 TL 1,733.26 TL 63.41 TL 1,669.85 TL 3,402.87 TL
35 15.10.2019 3,402.87 TL 1,733.26 TL 42.54 TL 1,690.72 TL 1,712.15 TL
36 15.11.2019 1,712.15 TL 1,733.55 TL 21.40 TL 1,712.15 TL 0.0 TL
 Refinance

• A refinance occurs when a business or person revises a payment

schedule for repaying debt. Mechanically, the old loan is paid off and
replaced with a new loan offering different terms.
• When a company refinances, it typically extends the maturity date.
Companies or individuals refinancing loans may have to pay a penalty
or fee.
 Refinance
• Borrowers refinance for myriad reasons. A common goal is to pay less
interest over the life of the loan.
• Borrowers may also want to change the duration of the loan or switch
from a fixed-rate to an adjustable-rate mortgage, or vice versa.
• The reasons and motivations behind refinancing a loan are as varied
as the loan types offered.
 24. ayda faizler 0.01 e düşerse refinancing
yapmak mantıklı bir karar mıdır?
i=0.0125
Anapara Dönem Sonu
Dönem Başı Taksit faiz ödemesi ödemesi Bakiye i=0.0100
1 50,000.00 TL 1,733.26 TL 625.00 TL 1,108.26 TL 48,891.74 TL
2 48,891.74 TL 1,733.26 TL 611.15 TL 1,122.11 TL 47,769.63 TL
3 47,769.63 TL 1,733.26 TL 597.12 TL 1,136.14 TL 46,633.49 TL
Dönem başı anapara Dönem sonu
….. …… ….. ….. …. ….. anapara taksit faiz ödemesi ödemesi Kalan anapara
25 1 19,203.58 TL 1,733.26 TL 240.04 TL 1,493.22 TL 17,710.36 TL 1 19204 1706.25 192.04 1514.21 17689.79
26 2 17,710.36 TL 1,733.26 TL 221.38 TL 1,511.88 TL 16,198.48 TL 2 17689.79 1706.25 176.90 1529.35 16160.44
27 3 16,198.48 TL 1,733.26 TL 202.48 TL 1,530.78 TL 14,667.70 TL 3 16160.44 1706.25 161.60 1544.65 14615.79
28 4 14,667.70 TL 1,733.26 TL 183.35 TL 1,549.91 TL 13,117.79 TL 4 14615.79 1706.25 146.16 1560.09 13055.70
29 5 13,117.79 TL 1,733.26 TL 163.97 TL 1,569.29 TL 11,548.50 TL 5 13055.70 1706.25 130.56 1575.69 11480.00
30 6 11,548.50 TL 1,733.26 TL 144.36 TL 1,588.90 TL 9,959.60 TL 6 11480.00 1706.25 114.80 1591.45 9888.56
31 7 9,959.60 TL 1,733.26 TL 124.49 TL 1,608.77 TL 8,350.83 TL 7 9888.56 1706.25 98.89 1607.36 8281.19
32 8 8,350.83 TL 1,733.26 TL 104.39 TL 1,628.87 TL 6,721.96 TL 8 8281.19 1706.25 82.81 1623.44 6657.75
33 6,721.96 TL 1,733.26 TL 84.02 TL 1,649.24 TL 5,072.72 TL 9 6657.75 1706.25 66.58 1639.67 5018.08
9
10 5018.08 1706.25 50.18 1656.07 3362.01
34 10 5,072.72 TL 1,733.26 TL 63.41 TL 1,669.85 TL 3,402.87 TL 11 3362.01 1706.25 33.62 1672.63 1689.38
35 11 3,402.87 TL 1,733.26 TL 42.54 TL 1,690.72 TL 1,712.15 TL 12 1689.38 1706.25 16.89 1689.36 0.02
36 12 1,712.15 TL 1,733.26 TL 21.40 TL 1,711.86 TL 0 TL TOPLAM 1271.03 19203.98
TOPLAM 1,595.83 TL 19,203.29 TL

fayda 324.74
yasal ceza (%2) 384.08
ÖDEV
• AYNI ŞARTLAR ALTINDA FAİZ ORANI 11. DÖNEMDE %1 OLSAYDI
REFINANCING MANTIKLI OLUR MUYDU?
• AYNI ŞARTLAR ALTINDA FAİZ ORANI 13. DÖNEMDE %1 OLSAYDI
REFINANCING MANTIKLI OLUR MUYDU?
• AYNI ŞARTLAR ALTINDA FAİZ ORANI 15. DÖNEMDE %1 OLSAYDI
REFINANCING MANTIKLI OLUR MUYDU?
• AYNI ŞARTLAR ALTINDA FAİZ ORANI 17. DÖNEMDE %1 OLSAYDI
REFINANCING MANTIKLI OLUR MUYDU?

• YASAL CEZA: KALAN ANAPARANIN %2 İLE ÇARPILMASIYLA BULUNUR.

 NET PRESENT VALUE (NPV)
(financial decision making)

• Economic life of investment = N

• Cost of Capital (discount rate) = k
• Salvage Value = H/S (cash inflow (+))
• Initial Investment = (cash outflow (-))
• For N= 5
• NPV = [++++] -
• NPV = -
• If NPV > 0 ACCEPT
• If NPV< 0 REJECT
 EXAMPLE 22:
• Economic Life = 5
• Cost of Capital = 10%
• Salvage Value = 0
• CF = 10000
• Initial Investment = 25000
• NPV = [++++] -
• NPV = 10000[] – 25000
• NPV = 12907.86 > 0 => ACCEPT
 What if, k = 5%, 15%, 20%, 25%, 30% 40%?

For k = 5% • For k = 25%

NPV = 10000[] – 25000 NPV = 10000[] – 25000
NPV = 43294.767 – 25000 NPV = 26892.8 – 25000
NPV = 18294.767 > 0 ACCEPT NPV = 1892.8 > 0 ACCEPT
• For k = 15% • For k = 30%
NPV = 10000[] – 25000 NPV = 10000[] – 25000
NPV = 33521.551 – 25000 NPV = 24355.697 – 25000
NPV = 8521.551 > 0 ACCEPT NPV = -644.303 < 0 REJECT
• For k = 20% • For k = 40%
NPV = 10000[] – 25000 NPV = 10000[] – 25000
NPV = 29906.121 – 25000 NPV = 20351.64 – 25000
NPV = 4906.121 > 0 ACCEPT NPV = -4648.36 < 0 REJECT
 NPV PROFILE
10000
8000
6000 IRR
4000
2000
0
0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4
-2000
-4000
-6000
 EXAMPLE 23:
• A company gets a contract and realises 7% annual return from the
contract. The company expects to realise $70000 at the end of every
year for 5 years. However accepting the contract requires capital
expense of $250000 at present. Should the company accept the
contract?

NPV = 70000[] – 250000

NPV = 287013.8205 – 25000
NPV =37013.8205> 0 ACCEPT
 EXAMPLE 24:
• Jordan Cor. a maker of casual, is considering a Project. Because of
past financial difficulties, the company has a high at 15%. The initial
investment of that Project is $60000. Cash flows of the project is
$25000 for 3 years. Calculate NPV of Project.

NPV = 25000[] – 60000

NPV = 57080.063 – 60000
NPV =-2919.937 < 0 REJECT
EXAMPLE 25:
• Suppose an investor is asked to invest 1000 and is promised in return
a payment of 600 in one year and 550 in the second year. What
interest rate is the investor earning on his/her invested money?

NPV = [600()+550 ()]-1000

Substitute with x;
NPV = 0;
1000 = 600 + 550
550+ 600 – 1000 = 0
55+ 60 – 100 = 0
(5+10)(11) = 0
(11) = 0
=> =
= => k = 0.10
 NPV – IRR
KARŞILAŞTIRILMASI
İSKONTO A PROJESİ NET
YIL ORANI NAKİT AKIŞI NPV A IRR A
0 0.00 -1000000 400,000.00 TL 15.91%
1 0.05 450000 236,262.99 TL
2 0.10 350000 111,305.79 TL
3 0.15 300000 15,024.19 TL
4 0.20 200000 -59,745.80 TL
5 0.25 100000 -118,169.60 TL

İSKONTO
YIL ORANI B PROJESİ NPV B IRR B
0 0.00 -1000000 850,000.00 TL 14.08%
1 0.05 0 449,109.50 TL
2 0.10 50000 167,671.34 TL
3 0.15 100000 -31,587.34 TL
4 0.20 200000 -173,450.36 TL
5 0.25 1500000 -274,688.00 TL
EĞER NPV IRR
WACC < 0.125 B KABUL A KABUL
0.125 < WACC < 0.1408 A KABUL A KABUL
0.1408 <WACC < 0.1591 A KABUL A KABUL
0.1591 < WACC A VE B RET A VE B RET
11. WEEK BOND VALUATION
• The fundamental principle of bond valuation is that the bond's value is
equal to the present value of its expected (future) cash flows. The
valuation process involves the following three steps:

1. Estimate the expected cash flows.

2. Determine the appropriate interest rate or interest rates that
should be used to discount the cash flows.
3. Calculate the present value of the expected cash flows found in step
one by using the interest rate or interest rates determined in step two.
 BOND VALUATION

Interest Payment

• B=I +
Maturity

Price of Bond
Nominal Price (Par Value)
 NOTATIONS
• B = Price of Bond
• M = The par value, face value, nominal price,redemption value
• i = Market interest rate
• r = Coupon interest rate
• I = M x r (Interest payment) (Amount of the coupon)
 EXAMPLE 26:
• A bond with a nominal price of 3500 matures 15 years. The nominal
rate of interest on bond is 12% per annum paid annually. What should
be the price of the bond so as to yield effective rate of return equal to
10%.
• Nominal price (M) = 3500
• Maturity (N) = 15
• Interest payment (M x r) = 3500 x 0.12 = 420 (I)
• B = 420 +
• B = 4032.4256

If B > M => The bond is said to sell at a Premium

• (B - M) = Premium
If B < M => The bond is said to sell at a Discount
• (M - B) = Discount

4032.4256 > 3500 => The bond is said to sell at a Premium.

 If i = 5%, 15%, 20%, 30% => B=?
bond valuatı on
7000.00
6043.02
6000.00

5000.00
4032.43
prıce of bond

4000.00
2886.03
3000.00
2190.87
2000.00 1441.03
1000.00

0.00
0.05 0.10 0.15 0.20 0.30
market ınterest rate
 EXAMPLE 27:
• A 10 year 1000 par bond with 8% semiannual coupons is callable
in 7 years. At what price should an investor buy the bond to yield
7.2% convertible semiannually?
• I = M x r => I = 1000 x () = 40
• B = 40 + 1000(
• B = 433.90 + 609.4855
• B = 1043.39
STOCK VALUATION
Differences Between Debt and Equity
• Debt includes all borrowing incurred by a firm, including bonds, and is repaid
according to a fixed schedule of payments.
• Equity consists of funds provided by the firm’s owners (investors or stockholders)
that are repaid subject to the firm’s performance.
• Debt financing is obtained from creditors and equity financing is obtained from
investors who then become part owners of the firm.
• Creditors (lenders or debtholders) have a legal right to be repaid, whereas
investors only have an expectation of being repaid.

© 2012 Pearson Prentice Hall. All rights reserved. 7-34

Table 7.1 Key Differences between Debt
and Equity Capital

© 2012 Pearson Prentice Hall. All rights reserved. 7-35

Differences Between Debt and Equity:
Maturity
• Unlike debt, equity capital is a permanent form of financing.
• Equity has no maturity date and never has to be repaid by the firm.

© 2012 Pearson Prentice Hall. All rights reserved. 7-36

Common Stock Valuation
• Common stockholders expect to be rewarded through periodic cash dividends and
an increasing share value.
• Some of these investors decide which stocks to buy and sell based on a plan to
maintain a broadly diversified portfolio.
• Other investors have a more speculative motive for trading.
• They try to spot companies whose shares are undervalued—meaning that the true value of the
shares is greater than the current market price.
• These investors buy shares that they believe to be undervalued and sell shares that they think
are overvalued (i.e., the market price is greater than the true value).

© 2012 Pearson Prentice Hall. All rights reserved. 7-37

 STOCK VALUATION
Dividends

Discount Rate

Price of the Stock (Stock Value)

General Stock Valuation

= + + +…..+ +…..+

Zero Growth Model

Constant Growth Model
 ZERO GROWTH MODEL

• Assumption => D = D1 = D2 = D3
• P = + + +…..+ +…..+
• + + +…..+)
1−𝑟 𝑛
• 1 + + +…..+) Recall Sn=
1−𝑟
0
• P = ) => P = )
• P=
Example 28:
• D = $15
• k = 10% Zero Growth Model
•P = ?
• P = => P = = $150
 CONSTANT GROWTH MODEL
• Assumption => Dividends are projected to change geometrically with (1+g)
• g = Growth Rate, (1+g) = Common Ratio

• D1 = D0 (1+g)
• D2 = D1 (1+g) = D0 (1+g)2
• D3 = D2 (1+g) = D0 (1+g)3
• = D0
• = + + +…..+ +…..+
• + + +…..+)
• + + +…..+)
• 1 + (+(+…..+)
• P =) => P =)
• P = => P = 0
Example 29:
• D0 = $15
• g = 10% Constant Growth Model
• k = 15%
• P=?

• P = => P = 15 => $330

Example 30:
• Suppose the Paradise Prototyping Company has a policy of paying a
$10 per share dividend every year. If this policy is to be continued
indefinitely, what is the value of a share of stock if the required return
is 20 percent?
D = $10
k = 20% Zero Growth Model
P = => P = = $50
Example 31:
• Suppose an investor is considering the purchase of a share of th Utah
Mining Company. The stock will pay a $3 dividend a year from today.
This dividend is expected to grow at 10 percent per year for the
foreseeable future. The investor thinks that the required return on
this stock is 15 percent, given her assessment of Utah Mining’s risk.
What is the value of a share of Utah Mining Company’s stock?
• = $3
• g = 10%
• k = 15%
• P = => P = => P = = $60
Example 32:
• Consider the stock of Davidson Company, which will pay an annual
dividend of $2 one year from today. The dividend will grow at a
constant annual rate of 5% forever. The market requires a 12% return
on the company’s stock. What is the current price of a share of the
stock?
• = $2
• g = 5%
• k = 12%
• P = => P = => P = = $28.5714