Can anyone explain me how the solutio has been made ? And where I can find the theory behind it ? Or explain me the concept behind it ?
Sir I looked for it but the only thing I can found was how we can calculate interest and capital elements in an installment by calculating the amount of loan outstanding after the last installment. Please help me with the calculations used in the above given snap.
Hi Aakash, As the loan matures, principal amount increases and interest amount decreases (in each successive payment). Here, amount of principal in 8th payment is Rs. 211 and Interest amount is Rs. 789. Amount of principal payment will increase at the rate of compound annual effective interest rate (you can check this by taking a simple example). Therefore, amount in principal in 18th payment is 211*(1.07)^10. Since the loan consist of level payments, the total amount of payment will be Rs. 1000. Deduct the amount of principal calculated above from Rs. 1000 and you will get the amount of interest payment in 18th payment.
The way in which the principal/capital payment increases is illustrated in the loan schedule in the solution to Q9.9 in the chapter.
Capital component increases at the same rate (annual effective rate of interest) but the interest component doesn't decrease with this rate. Right?
