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9StockPortfolio
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Quote 9StockPortfolio Replybullet Posted: 19/Jan/2010 at 10:59am
Originally posted by Chetan Panchal

This is the trick most bank guys uses while calculating interest and generally people don't understand it.

The way you are calculating around 9% flat is not correct.

You are not using 1L for four years so if u paid appr.76000/- after 3 year still you are paying 9626 pa for fourth year for balance 24000 which is more than 9% pa.


check my table in the previous post..after 4 years, i am paying interest on the remaining capital only.. there principle amount is higher and interest is lower..
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Quote praveen Replybullet Posted: 19/Jan/2010 at 11:06am
I absolutely agree with your table which is calculated on the basis of 17% p.a. and that is your actual cost of funds.
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Quote 9StockPortfolio Replybullet Posted: 19/Jan/2010 at 11:07am
There are many methods to calculate interest.

1) In Excel, give this formula =PMT(17%/12,48,100000) you will get your answer..

2) As i shown in my early message, i have given complete amortization schedule.

Banks can not use their own calculation method. they have to follow standard interest calculation practices & formulas.
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Quote 9StockPortfolio Replybullet Posted: 19/Jan/2010 at 11:12am
Now the Flat interest calculation
If you simply calculate interest on 100000@17% you will pay every year Rs. 17000 so Rs. 68000 for 4 years. but actually you are paying 38504, why? because simultaneously you are paying back the principle also.

I would be paying total interest over 4 years 38504, that means
I have to pay Rs. 9626 per year. (38504/4)

That means I have to pay 9.63% every year on Rs. 100000 amount

that is called as flat calculation. This will give you idea if your borrowed funds generate more returns than 9.63% every year, at he end of the 4th year you will have surplus on the money you never owned.
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Quote praveen Replybullet Posted: 19/Jan/2010 at 11:18am

So do we agree that your cost of funds is 17% and not 9% (ie if you are buying stocks out of that money than your returns should be over and above 17% CAGR for you to make profits.)
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Quote 9StockPortfolio Replybullet Posted: 19/Jan/2010 at 11:20am
Smile
Now last argument..

If you could club this into your home loan. the formula =PMT(10.25%/12,240,100000) gives amount Rs.982
where

10.25%/12 = 0.85%
240 = 20 Yrs=Loan tenure
100000 = Loan Amount

The benefit of this workout is that you get tax relief as well as some returns from the market.

Hope we are on the same page now.

Thanks
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Quote 9StockPortfolio Replybullet Posted: 19/Jan/2010 at 11:27am
I assume that my cost of funds is the Interest i am paying i.e. 38504
Since this interest payment is spread over 4 years, i take it as my cost of funds for every year is Rs. 9626, which falls at 9.63% to the Loan amount of 100k
Now if i make 0.9% every month, i.e. Rs. 900 on Rs. 100000 (forget about taxes & brokerage) following table shows I earn  Rs. 4694 at the end of 4th year on the money (Borrowed capital) which i never own.
Yearly Interest Monthly Interrest Monthly Principle EMI Returns in the market

Principle 17% 12 2886
0.90%
Month 1 100000 17000 1417 1469 2886 900
Month 2 98531 16750 1396 1490 2886 900
Month 3 97041 16497 1375 1511 2886 900
Month 4 95529 16240 1353 1533 2886 900
Month 5 93997 15979 1332 1554 2886 900
Month 6 92442 15715 1310 1576 2886 900
Month 7 90866 15447 1287 1599 2886 900
Month 8 89267 15175 1265 1621 2886 900
Month 9 87646 14900 1242 1644 2886 900
Month 10 86001 14620 1218 1668 2886 900
Month 11 84334 14337 1195 1691 2886 900
Month 12 82642 14049 1171 1715 2886 900
Month 13 80927 13758 1146 1740 2886 900
Month 14 79188 13462 1122 1764 2886 900
Month 15 77423 13162 1097 1789 2886 900
Month 16 75634 12858 1071 1815 2886 900
Month 17 73820 12549 1046 1840 2886 900
Month 18 71980 12237 1020 1866 2886 900
Month 19 70113 11919 993 1893 2886 900
Month 20 68221 11597 966 1920 2886 900
Month 21 66301 11271 939 1947 2886 900
Month 22 64354 10940 912 1974 2886 900
Month 23 62380 10605 884 2002 2886 900
Month 24 60378 10264 855 2031 2886 900
Month 25 58347 9919 827 2059 2886 900
Month 26 56288 9569 797 2089 2886 900
Month 27 54199 9214 768 2118 2886 900
Month 28 52081 8854 738 2148 2886 900
Month 29 49933 8489 707 2179 2886 900
Month 30 47754 8118 677 2209 2886 900
Month 31 45545 7743 645 2241 2886 900
Month 32 43304 7362 613 2273 2886 900
Month 33 41031 6975 581 2305 2886 900
Month 34 38727 6584 549 2337 2886 900
Month 35 36389 6186 516 2370 2886 900
Month 36 34019 5783 482 2404 2886 900
Month 37 31615 5374 448 2438 2886 900
Month 38 29176 4960 413 2473 2886 900
Month 39 26704 4540 378 2508 2886 900
Month 40 24196 4113 343 2543 2886 900
Month 41 21653 3681 307 2579 2886 900
Month 42 19074 3243 270 2616 2886 900
Month 43 16458 2798 233 2653 2886 900
Month 44 13805 2347 196 2690 2886 900
Month 45 11115 1889 157 2729 2886 900
Month 46 8386 1426 119 2767 2886 900
Month 47 5619 955 80 2806 2886 900
Month 48 2812 478 40 2846 2886 900


Total Interest 38506

43200


Total Profit 4694





Edited by 9StockPortfolio - 19/Jan/2010 at 11:29am
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Chetan Panchal
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Quote Chetan Panchal Replybullet Posted: 19/Jan/2010 at 11:27am
           You Earn @ 14.42%           
                    
                @9.63       you pay back
                    
1st year      100,000.00      14.42%      14,420.00       34,596.00
2nd year      79,824.00      14.42%      11,510.62       34,596.00
3rd year      56,738.62      14.42%      8,181.71       34,596.00
4th year      30,324.33      14.42%      4,372.77       34,596.00
                                      38,485.10       138,384.00

           You Pay @9.63%       38,504.00      
                    
           Net Loss       (18.90)
you have to earn more that 14.42% pa for break even.
Even more as i have calculated payback amount on y-o-y basis and not monthly which will furthur increase you % of cost of borrowing.so you have to earn around 17% appr.to break even only.    


Edited by Chetan Panchal - 19/Jan/2010 at 11:31am
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