Question

Loan amortization schedule Personal Finance Problem Joan Messineo borrowed ​$15,000 at a 14​% annual rate of interest to be repaid over 3 years. The loan is amortized into three​ equal, annual,​ end-of-year payments. a. Calculate the​ annual, end-of-year loan payment. b. Prepare a loan amortization schedule showing the interest and principal breadown of each of the three loan payments. c. Explain why the interest portion of each payment declines with the passage of time. a. The amount of the​ equal, annual,​ end-of-year loan payment is ​$6460.976460.97. ​(Round to the nearest​ cent.) b. Prepare a loan amortization schedule showing the interest and principal breakdown of each of the three loan payments. Many financial calculators have an amortization function which makes this process easy. ​ (Hint: Once the payment is determined in step a​ above, you can use the AMORT function to calculate the interest​ paid, principal paid and ending loan balance for each payment​ period). ​(Round to the nearest​ cent.) ​End-of-year Timeline ​Beginning-of-year Principal Loan Payment Interest Payment Principal Payment ​End-of-year Principal 1 ​$1500015000 ​$6460.976460.97 ​$21002100 ​$4360.974360.97 ​$10639.0310639.03 2 ​$nothing ​$nothing ​$nothing ​$nothing ​$nothing 3 ​$nothing ​$nothing ​$nothing ​$nothing ​$nothing c. Explain why the interest portion of each payment declines with the passage of time. ​(Select the best answer​ below.)

Answer 1

Answer:

a) annual payment = PV of the loan / PV annuity factor

i = 14%

n = 3

PV annuity factor, 14%, 3 periods = 2.3216

annual distribution = $15,000 / 2.3216 = $6,461.06

b)

principal      cash payment      interest paid    principal paid       ending bal.  

15,000         6,461.06               2,100                4,361.06                10,638.94

10,638.94    6,461.06               1,489.45           4,971.61                 5,667.33

5,667.33      6,461.06               793.73             5,667.33                0

c) the interest portion declines with every payment because interest is charged over the principal's balance, and if the principal decreases, then the interest will be lower.