Question

Jan sold her house on December 31 and took a $10,000 mortgage as part of the payment. The 10-year mortgage has a 10% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS form 1040 the amount of interest that was included in the two payments she received during the year.a. What is the dollar amount of each payment Jan receives?b. How much interest was included in the first payment? How much repayment of principal was included? How do these values change for the second payment?c. How much interest must Jan report on Schedule B for the first year? Will her interest income be the same next year?d. If the payments are constant, why does the amount of interest income change over time?

Answer 1

Answer:

a) quota: $ 802.43

b) 500 and then, 484.88 for interest

   302.43 and 317.54

C) total interest: 984.88

D) the interest will decrease and the amortization over time will increase

E) as the loan has a given date. At that date the principal outstanding must be zero therefore, after each payment the principal is reduced making interest decrease as well. This decrease in interest is replaced with an increase in the amortization-

Explanation:

$PV \div \frac{1-(1+r)^{-time} }{rate} = C$

PV 10,000

time 20

rate 0.05

$10000 \div \frac{1-(1+0.05)^{-20} }{0.05} = C$

C  $ 802.426

Interest on first quota:

10,000 x 0.05 = 500

Amortization on first quota:

802.43 - 500 = 302.43

Interest in second quota:

(10,000 - 302.43) x 0.05 = 484,8785‬

amortization on second quota:

802.42 - 484,88 = 317,54‬

Interest for the year:

500 + 484.88 = 984.88