Suppose you borrowed $50,000 at a rate of 8.5% and must repay it in 5 equal...

Suppose you borrowed $50,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you own in the first year?

Solutions

Expert Solution

Annual Payment = [Loan Amount * r] / [1 - (1 + r)^-n]

= [$50,000 * 0.085] / [1 - (1 + 0.085)^-5]

= $4,250 / 0.3350 = $12,688.29

Interest Portion of First Payment = Outstanding loan at start of year * Interest Rate

= $50,000 * 0.085 = $4,250

Principal repayment portion of first payment = Annual Payment - Interest Portion of First Payment

= $12,668.29 - $4,250 = $8,438.29

So, you will reduce the loan amount by $8,438.29 in the first year.

jeff jeffy answered 1 year ago

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