Question

Assume that your aunt sold her house on December 31, and to help close the sale she took a second mortgage in the amount of $20,000 as part of the payment. The mortgage has a quoted (or nominal) interest rate of 6%; it calls for payments every 6 months, beginning on June 30, and is to be amortized over 5 years. Now, 1 year later, your aunt must inform the IRS and the person who bought the house about the interest that was included in the two payments made during the year. (This interest will be income to your aunt and a deduction to the buyer of the house.) To the closest cent, what is the total amount of interest that was paid during the first year? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Answer:

$1,164.99

Explanation:

nominal interest rate = 6%

effective interest rate = (1 + 6%/2)² - 1 = 6.09%

the semiannual payment = principal / PV annuity factor

• principal = 20,000
• PV annuity factor, 3.045%, 10 periods = 8.510638

semiannual payment = $2,350

I prepared an amortization schedule on an excel spreadsheet.

After the first two payments were collected, principal has decreased to $16,464.99, that means that the total interest earned = (2 x $2,350) - ($20,000 - $16,464.99) = $4,700 - $3,535.01 = $1,164.99

Download pdf