If the interest rate on the loan is 7%, what is the amount of principal in the second payment?

You borrow $12,000 today. The loan will be repaid in annual payments over 10 years. If the interest rate on the loan is 7%, what is the amount of principal in the second payment?

Expert Solution

1. Computation of Annual payment

Annual Payment = Loan Amount / Present value annuity factor(7%,10years)

Annual Payment = 12000 / 7.0236

Annual Payment = $1708.53

2. Interest amount in first payment = loan amount * 7% = 12000 * 7% = $840

3. Loan Balance after first annual payment = $12000 - (1708.53 - 840) = $11131.47

4. Interest amount in second payment = loan balance * 7% = 11131.47 * 7% = $779.20

5. The amount of principal in the second payment = Annual payment - Interest for 2nd years

The amount of principal in the second payment = 1708.53 - 779.20

The amount of principal in the second payment = $929.33

jeff jeffy answered 3 years ago

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