Deducting principal in cash flow
Hello folks!
Have a question. I saw a couple of financial models for start-up projects, where interest on loan is deductible each year and principle is to be deductible in the terminal year plus terminal year interest on loan. But wait a minute, the company wants to attract loan from a bank. My understanding is it should repay interest and principal every year (12 times a year). I know that when companies issue bonds they pay coupon twice/once a year and final coupon plus principal in the final year. But here is a different situation. It's not a bond issuance, the project will attract bank loan. So interest and principal should be paid every year (12 times a year). Am I correct? Please shed a light on the situation.
Cheers,
Financier_MA
In reality interest and principal should be paid every month or 12 times a year. So by not deducting portion of principal in each year, don't we falsify cash outflows for each year?
Loans can have different terms and amortization schedules. Perhaps it is an interest only loan with a balloon payment at the end of the term, or amortizes at different rates each year... the amort is part of negotiations between the financer and the borrower.
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