A bank customer takes out a loan of 500 with a 16% nominal interest rate convertible quarterly. The customer makes paym...

Question

Question

A bank customer takes out a loan of 500 with a 16% nominal interest rate convertible quarterly. The customer makes payments o

business finance

Answer 1

Answer #1

We would prepare amortization table for 4 years in order to calculate the principal amount in fourth payment

Quarterly interest rate	4.00%	16%/4

Period	Quarterly payments (a)	Interest (b)	Principal payment (a-b) (c )	Balance outstanding (a-c)
				$500.00
1	$20.00	$20.00	$0.00	$500.00
2	$20.00	$20.00	$0.00	$500.00
3	$20.00	$20.00	$0.00	$500.00
4	$20.00	$20.00	$0.00	$500.00

Interest = Previous quarter loan balance*Quarterly interest rate

In each of the period, the amount of interest equals to quarterly payment and thus there is no amount left to pay the principal on loan.

Thus, amount of principal in fourth payment is $0 (Option A)

Answer 2

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