Question

showing the student's calculations (using the variables from a financial calculator) and answer for each of the 3 parts required in the problem. Make sure answers are clearly identified.

Loan amortization schedule Joan messineo borrowed 15,000 at 14% annual rate of interest to be repaid over 3 years. The loan is amortizd into three equal, annual, end of year payments.

a. calculate the annual end of year loan payment

b. prepare a loan amortization schedule showing the interest and principal break down of each of the three laon payments.

c. explain why the interest portion of each payment declines with the passage of time.

B-1.) Based on the loan amortization schedule, what conclusion can be made about the principal repayments and interest payments from this example?

c-1.) The loan amortization schedule in this problem is to satisfy a 3 year loan with annual payments. If you are considering selecting a mortgage of either a 15 year mortgage or a 30 year mortgage, what should be taken into consideration to help you choose between either loan maturities? What adjustments would have to be made to this problem's set up to accommodate a typical mortgage example?

Answer 1

PVIFA(14%, 3) = 2.321632

loan outstanding = 15000

installment amt. = 15000/2.431632

= 6460.97 0r 6461

(a) annual and year loan payment = 6461

(b) calculation of loan amortization schedule -

Year	Loan outstanding	installment	interest	principal	closing amt.
1	15000.0	6461.0	2100	4361.0	10639.0
2	10639.0	6461.0	1489.464	4971.5	5667.5
3	5667.5	6461.0	793.4527	5667.5	0.0

(C) as we can see in the above table that at the end of year, loan outstanding amt. has been reduced by the principal amt.that's why the interest portion of each payment declines with the passage of time.

(B-1) Conclusion - interest amt . is going down on every year or principal amt. is reducing in increasing manner avery year. means interest amt, will be greater by the increase in the no. of years.

(C-1) PVIFA (14%, 15) = 6.142168

= 15000/6.142168

= 2442.13

Year	Loan outstanding	installment	interest	principal	closing amt.
1	15000.0	2442.1	2100	342.1	14657.9
2	14657.9	2442.1	2052.101	390.0	14267.8
3	14267.8	2442.1	1997.497	444.6	13823.2
4	13823.2	2442.1	1935.247	506.9	13316.3
5	13316.3	2442.1	1864.283	577.9	12738.5
6	12738.5	2442.1	1783.384	658.8	12079.7
7	12079.7	2442.1	1691.159	751.0	11328.7
8	11328.7	2442.1	1586.022	856.1	10472.6
9	10472.6	2442.1	1466.166	976.0	9496.6
10	9496.6	2442.1	1329.531	1112.6	8384.0
11	8384.0	2442.1	1173.766	1268.4	7115.7
12	7115.7	2442.1	996.1948	1445.9	5669.7
13	5669.7	2442.1	793.7633	1648.4	4021.4
14	4021.4	2442.1	562.9913	1879.1	2142.2
15	2142.2	2442.1	299.9112	2142.2	0.0
		Total	21632.02	15000.0

now loan amortization schedule = 30 years

PVIFA(14%,30) = 7.002664

installment = 15000/7.002664

= 2142.042

loan amortization schule -

Year	Loan outstanding	installment	interest	principal	closing amt.
1	15000.0	2142.0	2100	42.0	14958.0
2	14958.0	2142.0	2094.114	47.9	14910.0
3	14910.0	2142.0	2087.404	54.6	14855.4
4	14855.4	2142.0	2079.755	62.3	14793.1
5	14793.1	2142.0	2071.035	71.0	14722.1
6	14722.1	2142.0	2061.094	80.9	14641.2
7	14641.2	2142.0	2049.761	92.3	14548.9
8	14548.9	2142.0	2036.842	105.2	14443.7
9	14443.7	2142.0	2022.114	119.9	14323.7
10	14323.7	2142.0	2005.324	136.7	14187.0
11	14187.0	2142.0	1986.183	155.9	14031.2
12	14031.2	2142.0	1964.363	177.7	13853.5
13	13853.5	2142.0	1939.488	202.6	13650.9
14	13650.9	2142.0	1911.13	230.9	13420.0
15	13420.0	2142.0	1878.803	263.2	13156.8
16	13156.8	2142.0	1841.949	300.1	12856.7
17	12856.7	2142.0	1799.936	342.1	12514.6
18	12514.6	2142.0	1752.042	390.0	12124.6
19	12124.6	2142.0	1697.442	444.6	11680.0
20	11680.0	2142.0	1635.198	506.8	11173.1
21	11173.1	2142.0	1564.239	577.8	10595.3
22	10595.3	2142.0	1483.347	658.7	9936.6
23	9936.6	2142.0	1391.13	750.9	9185.7
24	9185.7	2142.0	1286.002	856.0	8329.7
25	8329.7	2142.0	1166.156	975.9	7353.8
26	7353.8	2142.0	1029.532	1112.5	6241.3
27	6241.3	2142.0	873.7811	1268.3	4973.0
28	4973.0	2142.0	696.2246	1445.8	3527.2
29	3527.2	2142.0	493.8102	1648.2	1879.0
30	1879.0	2142.0	263.0578	1879.0	0.0
		Total	49261.26	15000

inflation factor would help me to choose between either loan maturities.

inflation adjustment would have to be made to this problem's set up to accomodate a typical mortgage example.

Please comment in case of any clarification required.