Interest Rates - Application: Discount Rates and Loans

3 important questions on Interest Rates - Application: Discount Rates and Loans

When you want to take a loan, that is receive cash now in exchange for promised future payments, there is an equality that must hold in order for the bank to accept your loan. What equality is this?

The present value of the promised future payments discounted at the loan's interest rate must equal the amount of cash borrowed

How do you calculate the amount owed on an amortizing loan at any point of time?

You take the present value of the future obligations

What do you use as a discount rate when determining the PV of the remaining loan payments on an amortizing loan?

The interest rate of the loan

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