General Electric got a SR 100, 000, 000 loan repaid over a 5-year period at 0.5%...

General Electric got a SR 100, 000, 000 loan repaid over a 5-year period at 0.5% per month interest.
What is the difference in the amount of interest in the second month’s payment if interest is charged on the principle of the loan rather on the unrecovered balance?

Expert Solution

Basically there are two ways of charging interest. One is on the opening balance of the loan on each month and one is to charge the fixed interest on the loan amount at the very beginning.

If interest is charged on the opening balance we need to find out the monthly payment first
- If monthly interest rate is 0.5% then the annual interest rate will be 6%
- Opening balance = previous year's closing balance
- Closing balance = Opening balance+Loan-Principal repayment
- PMT is calculated as per the above formula
- Interest = 0.06 /12 x opening balance
- Principal repayment = PMT - Interest
- The interest in the second month is $4,92,833.60
If interest is charged on the Original loan, then the interest = 0.5% x $100,000,000.00 = $5,00,000.00
Difference between the two = $5,00,000.00 - $4,92,833.60 = $7,166.40

jeff jeffy answered 7 months ago

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