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So here is my problem - I have pmt function in excel -

A)
    rate daily  10/100/360
    number of terms 360
    Present Value   100000
    Future Value    0
    Advance/Arrear  1

    pmt=    $291.86

I created mortgage based on above pmt for 360 days.

B) rate Annual  10/100/12
number of terms 12
Present Value   100000
Future Value    0
Advance/Arrear  1


PMT =$8,718.93

I again created a mortgage on above pmt for 12 months.

I was expecting 

SumOfCapital(A) = SumOfCapital(B)= $100,000.00  Which is fine
but i was expecting below to be same. 
SumOfPayment(A) is not equal to SumOfPayment(B)
SumOfInterest(A) is not equal to SumOfInterest(B).

Logically i believed that mortgage created considering daily interest for 360 days and grouping each of 30 days ( pmt , Interest Component and Capital Component) should be same as Mortgage created for 12 months on monthly interest rate. Any help or discussion is deeply appreciated.

NewToNet
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1 Answers1

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The difference is due to compounding. If you compound interest 360 times you will pay more interest than if you compound it 12 times.

You pay interest on the interest but in one month if you don't do that every day then you only pay interest on your interest once instead of 30 times.

Elizabeth
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