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The interest rate for the first three years of an $86,000 mortgage is 7.4% compounded semiannually....

The interest rate for the first three years of an $86,000 mortgage is 7.4% compounded semiannually. Monthly payments are based on a 20-year amortization. Suppose a $4500 prepayment is made at the end of the sixteenth month.

  

a. How much will the amortization period be shortened?
The amortization period will be shortened by  months.

   

b.

What will be the principal balance at the end of the three-year term? (Round your answer to the nearest cent.)

Solutions

Expert Solution

Nominal interest rate of 7.4% compounded semi annually is equal to 7.288430% compounded monthly as follows:

Monthly payments = $681.73 as follows:

Upon prepayment of $4,500 at the end of sixteenth month,

(a ): Revised amortization period= 217 months

Decrease in amortization period= 240-217= 23 months (1 year and 11 months)

(b ): Principal at the end of 3-year term=$ 74,528.55

Relevant portions of amortization schedule below:

jeff jeffy answered 1 year ago
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