Question

You plan to borrow $40,000 at a 6% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Answer 1

Let us calculate annual payment
EMI
Loan Amount	$   40,000.00
Interest rate per period	6.00%
Number of periods	7
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
Where,
EMI= Equal Monthly Payment
P= Loan Amount
R= Interest rate per period
N= Number of periods
= [ $40000x0.06 x (1+0.06)^7]/[(1+0.06)^7 -1]
= [ $2400( 1.06 )^7] / [(1.06 )^7 -1
=$7165.40
Let us calculate interest for second year
Year 1 opening balance	$   40,000.00
Add: Interest	$     2,400.00
Less: Payment	$     7,165.40
Closing balance at year 1	$   35,234.60
Interest for second year	$     2,114.08