Question

In: Finance

Calculate how much interest you would pay during the first 12 months if you were to...

Calculate how much interest you would pay during the first 12 months if you were to borrow $10,000 at 6% to paid off in 5 years via monthly installments. This loan is compounded monthly. Based on the total amount of interest paid during the first 12 months, what is the loan effective interest rate for year 1?

Solutions

Expert Solution

1: Interest paid in first 12 months = 515.90

2: Effective rate = Interest/Loan

= 515.90/10000

= 5.16%

Workings

Loan Amount Interest Rate Term in Years Monthly Payment
$10,000.00 6.00% 5 $193.33
Month StartingBalance Interest Principal EndingBalance TotalInterest
1 $10,000.00 $50.00 $143.33 $9,856.67 $50.00
2 $9,856.67 $49.28 $144.04 $9,712.63 $99.28
3 $9,712.63 $48.56 $144.76 $9,567.86 $147.85
4 $9,567.86 $47.84 $145.49 $9,422.37 $195.69
5 $9,422.37 $47.11 $146.22 $9,276.16 $242.80
6 $9,276.16 $46.38 $146.95 $9,129.21 $289.18
7 $9,129.21 $45.65 $147.68 $8,981.53 $334.82
8 $8,981.53 $44.91 $148.42 $8,833.11 $379.73
9 $8,833.11 $44.17 $149.16 $8,683.95 $423.90
10 $8,683.95 $43.42 $149.91 $8,534.04 $467.32
11 $8,534.04 $42.67 $150.66 $8,383.38 $509.99
12 $8,383.38 $41.92 $151.41 $8,231.97 $551.90


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