Joan Messineo borrowed $15,000 at a 14% annual rate of interest to be repaid over 3...

Joan Messineo borrowed $15,000 at a 14% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, end-of-year payments.
(i) Calculate the annual, end-of-year loan payment.
(ii) Prepare a loan amortization schedule showing the interest and principal breakdown of each of the three loan payments.
(iii) Explain why the interest portion of each payment declines with the passage of time.

Expert Solution

Loan	15000
Interest	14.0%
Time	3 years

Annuity Factor	=(1-((1+r)^-n))/r
	=(1-((1+14%)^-3))/14%
	2.3216

Answer to i)
Annual Payment	=15000/2.3216
Annual Payment =	$6,460.97


Answer to ii)

Loan Amortization Schedule
Month	Loan Beginning (A)	*Interest (B = A14%%)**	Monthly Payment (C)	Principal Payment (D = C-B)	Loan Outstanding (E = A + B - C)
1	15000.00	2100.00	6460.97	4360.97	10639.03
2	10639.03	1489.46	6460.97	4971.51	5667.52
3	5667.52	793.45	6460.97	5667.52	0.00

Answer to iii)
Interest payment is based on opening outstanding balance of loan and hence reduces with each payment of principal amount, that’s how it declines with passage of time

jeff jeffy answered 2 years ago

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