The document discusses two methods for repaying term loans: 1. Capital recovery method, which calculates equal annual installments to fully repay the principal over a set number of years. An example calculates installments of Tk. 121,605 to repay a Tk. 500,000 loan over 6 years at 12% interest. 2. Balloon method, where lower interest installments are paid each year but the remaining principal is due in a final "balloon" payment. An example shows repayment of Tk. 600,000 over 8 years at 14% interest through annual Tk. 75,000 installments plus a final Tk. 75,000 balloon payment.

1. Problem for Intermediate term loan
Methods of Repayment of Term Loan:
Capital Recovery Method:
Capital recovery is the earning back of the initial funds put into an investment. Capital
recovery must occur before a company can earn a profit on its investment.
2. A euphemism for debt collection. Capital recovery companies obtain overdue payments
from individuals and businesses that have not paid their bills. Upon obtaining payment and
remitting it to the company to which it is owed, the capital recovery company earns a fee
for its services.
3. A company's recouping of the money it has invested in machinery and equipment
through asset disposition and liquidation.
Problem-1:
Suppose that you are a finance officer of Apex shoe limited and you borrow Tk. 500000 at 12%
interest rate to be repaid over next 6 years. Payment will be made in equal installments at the end
of each year. How much should be paid in each installment? You are also required to show the
repayment schedule by using Capital Recovery Method.
Solution:
We know that, the annual installment can be calculated using the following formula:
𝐴 =
𝑃
1
𝑅
−
1
𝑅(1 + 𝑅) 𝑁
Where,
Methods of
Repayment of
Term Loan
Baloon Method Capital Recovery

2. A=Periodic Payment
R= Rate of Interest
N= No. of Years
=
5,00,000
1
0.12
−
1
0.12(1+0.12)6
𝐴 =
5,00,000
4.1114
= 𝑇𝑘. 1,21,605 (𝐴𝑝𝑝.)
Repayment Schedule:
1 2 3 4 5
End of
Period
Installment
Payment
Principal Amount
Payable (Col.2-4)
Annual Interest
(Col.2×0.12)
Remaining Balance of
Principal (Col.5-3)
0 0 0 0 500000
1 121605 61605 60000 438395
2 121605 68998 52607 369397
3 121605 77277 44328 292120
4 121605 86551 35054 205569
5 121605 96937 24668 108633
6 121605 108569 13036 0
2. Baloon Method:
A balloon loan is a type of loan that does not fully amortize over its term. Since it is not fully
amortized, a balloon payment is required at the end of the term to repay the remaining
principal balance of the loan. Balloon loans can be attractive to short-term borrowers
because they typically carry lower interest rates than loans with longer terms; however,
the borrower must be aware of refinancing risks or the risk the loan may reset at a higher
interest rate.
Problem-2:
Rahima Food Ltd. needs Tk. 600,000 to finance its intermediate term capital requirement for
remodeling of food processing equipments. Agrani bank Ltd. agreed to meet the requirement at
14% interest. the loan should be repaid in the nest 8 years. You are required to show the repayment
schedule by using Balloon Method.
Solution:

3. Principal Payment= TK.600,000/8years = Tk. 75,000
Loan Repayment Schedule under Baloon Method:
Ye
ar
Loan in the
beginning
Principal
Repayment
Interest
(Col.2×0.14)
Total
Payment
(3+4)
Loan Due at the end of
the year (2-3)
1 600000 75000 84000 159000 525000
2 525000 75000 73500 148500 450000
3 450000 75000 63000 138000 375000
4 375000 75000 52500 127500 300000
5 300000 75000 42000 117000 225000
6 225000 75000 31500 106500 150000
7 150000 75000 21000 96000 75000
8 75000 75000 10500 85500 0