Question

Loan amortization schedule Personal Finance Problem Joan Messineo borrowed $46,000 at a 4% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual end-of-year payments Calculate the annual end of year loan payment b. Prepare a loan amortization schedule showing the interest and principal breakdown 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 $ . (Round to the nearest cont.) 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. 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. You should consult your calculator instructions for specifie details pertaining to your calculator What is the account balance at the beginning of your 1? (Round to the nearest cent.) Beginning of year principal Loan payment End-of-year Payments Interest Principal End-of-year principal What is the amount of the loan payment at the end of year 1? (Round to the nearest cont.) Beginning of year principal $46,000 End-of-year Payments interest Principal Loan payment SL End-of-year principal What portion of the payment is applied to interest in your 12 (Round to the nearest cont.) Click to select your answers).

Answer 1

a]

Monthly loan payment is calculated using PMT function in Excel :

rate = 4% (annual rate of interest)

nper = 3 (3 year loan with 1 payment each year)

pv = 46000 (loan amount)

PMT is calculated to be $16,576.03

: x x f А1 A A | ($16,576.03)! =PMT(4%,3,46000) D E B C

b]

Interest in each year = principal outstanding at beginning of year * 4%

Principal portion of yearly payment = yearhly payment minus interest portion of payment

principal outstanding at end of year = principal outstanding at beginning of year minus principal portion of yearly payment

I I . B C D E F G H Principal outstanding at 1 Year beginning Payment 1 $ 46,000.00 $ 16,576.03 2 $ 31,263.97 $ 16,576.03 4 3 $ 15,938.49 $ 16,576.03 Principal outstanding Principal $ 14,736.03 $ 31,263.97 $ 15,325.47 $ 15,938.49 $ 15,938.49 $ Interest $ 1,840.00 $1,250.56 $ 637.54 $16,576.03

A B C D E F G H Principal outstanding at 1 Year beginning 2 1 46000 32 =F2 4 3 =F3 Principal outstanding at end =B2-E2 =B3-E3 =B4-E4 Payment Interest Principal =$H$2 =B2*4% =C2-D2 =$H$2 =B3*4% =C3-D3 =$H$2 =B4*4% =C4-D4 =PMT(4%,3,-46000)

c]

B is the correct option

As the principal balance is decreasing, the interest charged is also decreasing