Question

27.Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2

Answer 1

Answer:

The amount of interest that you would be paying in Year 2 is $7,927.03.

Explanation:

To calculate this, we first calculate the annual required fixed payment using the formula for calculating loan amortization as follows:

P = (A * (r * (1 + r)^n)) / (((1+r)^n) - 1) .................................... (1)

Where,

P = Annual required fixed payment = ?

A = Loan amount = $100,000

r = interest rate = 8.5%, or 0.085

n = number of payment years = 10

Substituting all the figures into equation (1), we have:

P = (100,000 * (0.085 * (1 + 0.085)^10)) / (((1+0.085)^10) - 1)

P = $15,240.77

Therefore, we have:

Interest amount paid in year 1 =  Loan amount * interest rate = $100,000 * 8.5% = $8,500

Principal repaid in year 1 =  Annual required fixed payment - Interest amount paid in year 1 =  $15,240.77 - $8,500 = $6,740.77

Beginning loan balance in year 2 = Loan amount - Principal repaid in year 1 = $100,000 - $6,740.77 = $93,259.23

Interest amount paid in year 2 =  Beginning loan balance in year 2 * interest rate = $93,259.23 * 8.5% = $7,927.03

Therefore, the amount of interest that you would be paying in Year 2 is $7,927.03.