Question

Your bank offers to lend you $114,400 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

a. $10,428.81

b. $8,615.10

c. $9,068.53

d. $7,254.82

e. $8,161.67

Answer 1

Interest that would be paid in Year 2: c. $9,068.53

Principal amount (A)	$   114,400.00
PVAF (10 years, 8.5%) (B)	6.561348058
Annual installment(A) ÷ (B)	$      17,435.44

Year	Principal	Interest @ 8.5%	Annual Installment	Ending Balance
	a = c - b	b	c
0	$        114,400.00	$                          -	$                          -	$        114,400.00
1	$             7,711.44	$             9,724.00	$          17,435.44	$        106,688.56
2	$             8,366.91	$             9,068.53	$          17,435.44	$          98,321.65
3	$             9,078.10	$             8,357.34	$          17,435.44	$          89,243.55
4	$             9,849.74	$             7,585.70	$          17,435.44	$          79,393.81
5	$          10,686.97	$             6,748.47	$          17,435.44	$          68,706.84
6	$          11,595.36	$             5,840.08	$          17,435.44	$          57,111.48
7	$          12,580.96	$             4,854.48	$          17,435.44	$          44,530.52
8	$          13,650.35	$             3,785.09	$          17,435.44	$          30,880.18
9	$          14,810.63	$             2,624.81	$          17,435.44	$          16,069.55
10	$          16,069.53	$             1,365.91	$          17,435.44	$                     0.02

• Beginning balance: principal outstanding at the beginning of each year
• Interest paid: Interest on beginning balance @ 8.5%; For example, interest portion in first installment = $114,400 × 8.5% = $9,724; interest portion in second installment = $106,688.56 × 8.5% = $9,068.53
• Principal repaid in each year = annual installment - interest paid during the year