Question

A customer has taken out a fully amortized loan for $56,000 at a 7.5% interest rate over 7 years.   The marginal tax rate is 30%.

What is the yearly payment?

a.$10,572.82

b.$10,143.93

c.$9,458.92

d.$8,496.73

What is the interest payment in year 2?

a.$2,835.00

b.$2,438.68

c.$3,208.23

d.$3,722.04

What are the tax savings from interest in year 1?

a.$11,116.61

b.$793.80

c.$1,260.00

d.$2,835.00

Answer 1

Q-1)

a). Loan Amount = $56,000

Calculating the Yearly payment of loan:-

Where, P = Loan amount = $56,000

r = Periodic Interest rate = 7.5%

n= no of periods = 7 years

Yearly Payment = $10,572.82

Option A

- Creating an amortization table to answer part (b) and (c) of this question:-

Year	Beg bal.	Payment	Interest amount	Principal Amount	End Bal.
1	56,000.00	10,572.82	4,200.00	6,372.82	49,627.18
2	49,627.18	10,572.82	3,722.04	6,850.78	42,776.40

Note- The following Columns are calculated based on:

- Interest amount = beg. Balnace*Monthly interest rate

- Principal Amount = Payment - Interest amount

- End Bal. = Beg. Bal + Interest - Payment

b). Interest payment in Year 2 = $3722.04

Option D

c). Interest Payment in Year 1 = $4200

Tax saving of Interest Payment in Year 1 = Interest Payment in Year 1*(Tax rate) = $4200*30%

Tax saving of Interest Payment in Year 1 = $1260

Option C

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