Question

1. To expand your business selling collectibles on the Internet, you need a loan of $5,000. Your banker loans
you the money at a 12% annual interest rate, which you agree to pay back in three equal monthly
installments of $1,700.12.
(a) Construct an amortization schedule for this loan
(b) If the outstanding principal is not exactly $0 after the last payment, how will you modify the
respective row in order to zeroize the outstanding balance?

Answer 1

a)At the end of the first month, you have borrowed $5,000 for 1 month at a 1% monthly interest rate. So using the simple interest formula, the interest that you owe the bank is $5,000 * 0.01 * 1 = $50

Payment Number	Amount of Payment	Interest Payment	Applied to Principal	Balance
				$5,000
1	$1700.12	$50	$1650.12	$3,349.88
2	$1700.12	$33.50	$1,666.62	$1,683.26
3	$1700.12	$16.83	$1,683.29	-$0.03

Your payment is $1,700.12; therefore, $50 pays the interest, and the rest, $1,700.12 - $50 = $1,650.12, is applied to the principal.For the second month, you are now borrowing $5,000 - $1,650.12 = $3,349.88 at 1% monthly interest.We complete the computations for the payments on this loan in Table

b) As expected, we ended with a negative balance because the payment of $1,700.12 is a fraction of a cent larger than it needs to be. In an actual banking situation, the bank would adjust the final payment so that the final balance is exactly $0.00.