Question

4.Amortization with Equal Payments [LO3] Prepare an amortization schedule for a five-year loan of $71,500. The interest rate is 7 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year? How much total interest is paid over the life of the loan?

5.Amortization with Equal Principal Payments [LO3] Rework Problem 4 assuming that the loan agreement calls for a principal reduction of $14,300 every year instead of equal annual payments.

***PLEASE TYPE THE ANSWERS***

Answer 1

Question 4:

PV = Loan Amount = $71,500

r = interest rate = 7%

n= 5 years

Annual loan installment payment = [r*PV] / [1 - (1+r)^-n]

= [$71,500 * 7%] / [1 - (1+7%)^-5]

= $5,005 / [1 - 0.7129862]

= $5,005 / 0.2870138

= $17,438.1858991

Therefore, Annual loan installment is $17,438.19

Amortization schedule for equal installment payments

Interest paid in third year = $3,203.43

Total interest paid over the life of loan = $5,005 + $4,134.6767 + $3,203.4308 + $2,206.9976 + $1,140.8142

                                                      = $15,690.9193

Therefore, Total interest paid over life of loan is $15,690.92

Question 5:

Amortization schedule for equal principal payments

Interest paid in third year is $3,003

Total interest paid over life of loan = $5,005 + $4,004+ $3,003 + $2,002 + $1,001 = $15,015

Therefore, Total interest paid over life of loan is $15,015