Analyzing Loan Amortization in Corporate Finance Context

This report provides an overview of loan amortization within the context of corporate finance, detailing its process as a method of spreading out a loan into a series of fixed payments over time. It explains how each payment covers both the loan's interest and principal, with the proportion shifting from interest to principal as the loan matures. The report discusses the tools used in amortization, such as amortization schedules, and different methods including straight line and diminishing value methods. It highlights the benefits of amortization for both lenders, who receive a consistent stream of income and can easily track loan repayments, and borrowers, who gain predictability in budgeting and avoid large balloon payments. The report also presents a scenario where a customer borrows $200,000 to purchase trucks and uses the diminishing balance method for loan repayment. This report is helpful for students who want to learn about loan amortization and its benefits for borrowers and lenders.

Running head: FUNDAMENTAL OF CORPORATE FINANCE
Fundamental of Corporate Finance
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1FUNDAMENTAL OF CORPORATE FINANCE
Amortizing a Loan
Amortization is the procedure of scattering out a loan into a sequence of permanent
payments at finished period. In this disbursing off the advance's interest along with principal
in indifferent sum every month, though the full payment remnants equivalent every era. This
actually happens using scheduled loan disbursements, but repayment is a bookkeeping tenure
that can put on to other types of stabilities, such as assigning confident outlays over the
period of an impalpable asset. It is a kind of instalment loan in which interest sum is being
reduced after paying the monthly payment, along with any residual amount on the way to the
chief balance. At the time repayment of loan the greater portion of the repayment amount is
being forward towards the principal amount and the smaller amount is being headed for the
interest. In accounting terms amortization can be said as a procedure in which cost of an
impalpable asset is allocated over a certain era of time. (Godlewski & Sanditov, 2018).
ssume you work for a lending institution and one of your regular customers has
approached you to borrow $200,000 to purchase a fleet of trucks for her company.
Tools used to amortize a loan
In amortization schedule a table is framed to keep the record of timely payment of the
outstanding amount. Each specific figure is placed under the interest as well as principal
column as duly paid off. At the time of loan being matured principal gets the greater portion
of paid off amount. The schedule runs in a chronological order. Different methods to create
the schedule are straight line method, bullet, diminishing value, balloon, and annuity
methods. In the bullet method the loan is paid off at once. Balloon payment is that at the end
of the payment larger portion is paid off. (Grushkin & Bartfeld, 2013).

2FUNDAMENTAL OF CORPORATE FINANCE
In the given case the lending institution follows the straight line and diminishing
value method for the amortization schedule.
Amortization is beneficial to the lender
Lenders get a set of unaltered amount as interest as well as principal every month.
This help the small business enterprise of being maintain the transparent payable sum each
time. This helps the lender to keep the sound track of the borrowers and enable them to check
the timely repayment of loan and maintain their loan account. An unamortized loan, on the
additional side, would comprise interest-single expenditures along with a balloon
compensation at the conclusion for the voluntary principal. (Hartmann, 2015).
Amortization is beneficial to the borrower
Amortization provides the borrower an overview for the prediction and budgeting the
schedule paying of the monthly sum avoiding the bulk payment at the end of the loan term.
The aim of a borrower while paying off the loan is to avoid debt. Amortization gives the
borrower a smooth pavement of writing off the payment towards the interest as well as loan
principal figure. The borrower has to set the payment mode along with the method of
scheduling. The borrower, in case he or she marks on-period disbursements every month, the
threat to their acknowledgment or to disbursing additional burdens is significantly limited.
(Minnis & Sutherland, 2017).
In the given case customer borrows the loan of amount $ 200,000 for
purchasing a fleet of truck. She shall pay the loan and interest using diminishing balance
method of amortization schedule. It will be easy for her to maintain the record and help in
paying the amount.

3FUNDAMENTAL OF CORPORATE FINANCE
Reference:
Godlewski, C. J., & Sanditov, B. (2018). Financial institutions network and the certification
value of bank loans. Financial management, 47(2), 253-283.
Grushkin, J., & Bartfeld, D. (2013). Securitizing project finance loans: are PF CLOs poised
for a comeback?. The Journal of Structured Finance, 19(3), 76-81.
Hartmann, P. (2015). Real estate markets and macroprudential policy in Europe. Journal of
Money, Credit and Banking, 47(S1), 69-80.
Minnis, M., & Sutherland, A. (2017). Financial statements as monitoring mechanisms:
Evidence from small commercial loans. Journal of Accounting Research, 55(1), 197-
233.