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?

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

jeff jeffy answered 6 months ago

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