1. Loan Amortization problem - Bubba Gump’s new shrimp boat cost $70,000. He paid $25,000 up...

1. Loan Amortization problem - Bubba Gump’s new shrimp boat cost $70,000. He paid $25,000 up front and signed a 10-year, $45,000 mortgage at 11%.

a. What is the amount of each monthly payment?

b. Produce a loan amortization schedule for the first four payment periods.

c. What is the total interest Bubba will pay on this loan, assuming he pays it according to schedule?

d. Let’s say he comes into some dough and wants to pay off the loan immediately after making the 27th payment. How much does he owe at that point?

2. Retirement problem - When only a lad, Chase began investing $750 per month into a mutual fund that has earned on average 11% annually for the past 20 years.

a. How much is Chase’s account worth today?

b. Assume Chase decides to drop out of society and simply live off this investment. If he continues to earn 11% on the account, what is the maximum amount he can withdraw quarterly, assuming he plans to live 25 more years?

Expert Solution

1. Loan amount = $45,000, rate = 11%, term = 120 months

a) Monthly payment can be calculated using PMT function in excel. =-PMT(11%/12, 120, 45000) = $619.88

b) Loan amortization table is below

Payment	Opening balance	Interest payment	Principal repaid	Closing balance
1	45,000	413	207	44,793
2	44,793	411	209	44,583
3	44,583	409	211	44,372
4	44,372	407	213	44,159

Opening balance (from month 2) = prior period closing balance

Interest payment = interest rate (11%) * opening balance

Principal repaid = monthly payment ($619.88) - interest payment

Closing balance = opening balance - principal repaid

c) Total interest paid can be calculated using CUMIPMT function in excel = -CUMIPMT(11%/12, 120, 45000, 1, 120, 0) = $29,385

d) Extending the loan amortization table to 27 months we get outstanding balance to be paid off = $38,680

Payment	Opening balance	Interest payment	Principal repaid	Closing balance
27	38,943	357	263	38,680

jeff jeffy answered 2 years ago

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