Question

Loan amortization schedule John Milo borrowed $150,000 at a 14% annual rate of interest to be repaid over 5 years. The loan is amortized into five 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 breakdown of each of the five loan payments. c. Explain why the interest portion of each payment declines with the passage of time.

Answer 1

Answer and Explanation:

a. The computation of annual, end-of-year loan payment is shown below:-

Annual Installments = Loan Amount ÷ Present Value Annuity Factor

= $150,000 ÷ (14%,5)

= $150,000 ÷ 3.4330809

= $43,692.53

b. The Preparation of loan amortization schedule showing the interest and principal breakdown of each of the five loan payments is shown below:-

Year Opening        Annual           Principal            Interest       Closing

          balance     installments                                                    balance

1        $150,000    $43,692.53     $22,692.53     $21,000     $127,307.47

2       $127,307.47 $43,692.53    $25,869.48     $17,823.05  $101,437.99

3        $101,437.99  $43,692.53    $29,491.21     $14,201.32    $71,946.78

4        $71,946.78   $43,692.53     $33,619.98   $10,072.55    $38,326.80

5        $38,326.80  $43,692.53    $38,326.80    $5,365.75    $0.00

Working note:-

a. For computing the principal we simply deduct interest from annual installment.

b. For computing the interest we simply multiply the opening balance with the annual rate of interest that is 14%

c. For computing the closing balance we simply deduct the principal from opening balance.

3. On its most current closing loan balance, the interest on the amortized loan is measured and the interest rate declines with the passage of time as the Principal Amount decreases the loan balance that is based on interest.