Consider a 4-year amortizing loan. You borrow $2,900 initially and repay it in four equal annual...

Consider a 4-year amortizing loan. You borrow $2,900 initially and repay it in four equal annual year-end payments.

a. If the interest rate is 9%, what is the annual payment? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. Prepare an amortization schedule. (Do not round intermediate calculations.

Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required.)

Expert Solution

a) We are given the following information:

Payment	PMT	To be calculated
Rate of interest	r	9.00%
Number of years	n	4.00
Annual	frequency	1.00
Loan amount	PV	2900.00

We need to solve the following equation to arrive at the required PV

So the annual payment is 895.14

b) Amortization schedule is as follows:

Year	Opening Balance	PMT	Interest	Principal repayment	Closing Balance
1	$ 2,900.00	$ 895.14	$ 261.00	$ 634.14	$ 2,265.86
2	$ 2,265.86	$ 895.14	$ 203.93	$ 691.21	$ 1,574.65
3	$ 1,574.65	$ 895.14	$ 141.72	$ 753.42	$ 821.23
4	$ 821.23	$ 895.14	$ 73.91	$ 821.23	$ 0.00
		$ 3,580.56	$ 680.56	$ 2,900.00

Opening balance = previous year's closing balance
Closing balance = Opening balance-Principal repayment
PMT is calculated as per the above formula
Interest = 0.09 x opening balance
Principal repayment = PMT - Interest

jeff jeffy answered 1 year ago

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