Question

a. Complete an amortization schedule for a $32,000 loan to be repaid in equal installments at the end of each of the next three years. The interest rate is 10% compounded annually. If an amount is zero, enter "0". Do not round intermediate calculations. Round your answers to the nearest cent.

b. What percentage of the payment represents interest and what percentage represents principal for each of the three years? Do not round intermediate calculations. Round your answers to two decimal places.

c. Why do these percentages change over time?

1. These percentages change over time because even though the total payment is constant the amount of interest paid each year is declining as the remaining or outstanding balance declines.
2. These percentages change over time because even though the total payment is constant the amount of interest paid each year is increasing as the remaining or outstanding balance declines.
3. These percentages change over time because even though the total payment is constant the amount of interest paid each year is declining as the remaining or outstanding balance increases.
4. These percentages change over time because even though the total payment is constant the amount of interest paid each year is increasing as the remaining or outstanding balance increases.
5. These percentages do not change over time; interest and principal are each a constant percentage of the total payment.

Answer 1

Using Excel formula to calculate

	A	B	C	D	E	F
1	Amortisation Schedule
2
3	Loan Amount to be repaid(PV)	32000
4	Interest Rate(r)	10%
5	Length of loan (in years)	3
6
7	a. Setting up Amortization table		Formula
8	Calculation of loan payment	$12,867.67	PMT(B4,B3,-B2)
9
10	Years	Beginning Balance	PMT =PMT(7%,3,-41000)	Interest part of PMT	Principal part of PMT= PMT-Interest	Ending Balance
11	1.00	32000.00	12867.67	3200.00	9667.67	22332.33
12	2.00	22332.33	12867.67	2233.23	10634.44	11697.89
13	3.00	11697.89	12867.67	1169.79	11697.89	0.00
14
15	B. Calculating % of Payment Representung Interest and Principal of Each Year
16		% Interest	% Principal	Check Total=100%
17	Year 1	24.87%	75.13%	100%
18	Year 2	17.36%	82.64%	100%
19	Year 3	9.09%	90.91%	100%
20
21	Formula
22	Years	Beginning Balance	PMT =PMT(12%,3,-40000)	Interest part of PMT	Principal part of PMT= PMT-Interest	Ending Balance
23	1.00	B3	B8	B4*B23	C23-D23	B23-E23
24	2.00	F23	B8	B4*B24	C24-D24	B24-E24
25	3.00	F24	B8	B4*B25	C25-D25	B25-E25
26
27	B. Calculating % of Payment Representing Interest and Principal of Each Year
28		% Interest	% Principal	Check Total=100%
29	Year 1	D23/B23	E23/B23	B29+C29
30	Year 2	D24/B24	DE24/B24	B30+C30
31	Year 3	D24/B25	E24/B25	B30+C30

c. Option IV is correct option.