In: Finance
Classy Jewelry and More is talking with its bank about a
$360,000 loan. The loan would be for three years at 7% interest and
Classy would make three LEVEL TOTAL PAYMENTS at
the end of each of the next three years. Write an amorization
schedule and answer the following questions.
What is the amount of the total payment?
What is the amount of the principal payment in year two?
What is the amount of the ending balance in year one?
What is the amount of the interest in year three?
What is the total amount of interest that will be paid over the
life of the loan?
USE THE TABLES TO ANSWER THIS QUESTION.
Pam wants to buy her first home in five years. She will need
$20,000 as a down payment. Pam just won some money gambling and she
has deposited it into her savings account, which is earning 8% and
compounds quarterly.
What table will you look at to solve this problem?
What column will you look at?
What row will you look at?
What is the factor?
How much will Pam have to set aside now out of her winnings to have
the $20,000 in five years?
Amelia's Antiques just added a whole new line of furniture to
the product line. Amelia expects this addiition to result in record
high dividends of $5.25 and $5.50 in the next two years. After
that, she thinks that her growth will level off at its usual 3%
rate. The rate expected in the marketplace for investments similar
to Amelia's is 6%.
What is the current value of a share of Amelia's Antiques?
What will be the value of a share of Amelia's in five years?
What will be the value of a share of Amelia's in eighteen
years?
We can use excel to determine the level total payments or calculate it manually. In excel we will make use of the PMT function and the formula will be: PMT(7%, 3, 360000). This will give a value of $137,178.60.
Manually we can use the following equation: level payment = [(P*R)*(1+R)^n]/[(1+R)^n – 1]
= [(360000*7%*(1.07^3)]/[1.07^3 – 1]
= 30,871.08/0.225043
= $137,178.60
Now we can make the amortization schedule as shown below:
Year | Loan balance at start of year | Payment | Interest | Principal | Loan balance at end of year |
0 | 360,000.00 | ||||
1 | 360,000.00 | 137,178.60 | 25,200.00 | 111,978.60 | 248,021.40 |
2 | 248,021.40 | 137,178.60 | 17,361.50 | 119,817.10 | 128,204.30 |
3 | 128,204.30 | 137,178.60 | 8,974.30 | 128,204.30 | 0.00 |
Amount of total payment = 137,178.60*3 = 411,535.80
Amount of principal payment in year 2 = $119,817.10
Amount of ending balance in year 1 = $248,021.40
Amount of interest in year 3 = $8,974.30
Total interest paid over the life of loan = 25200 + 17361.50 + 8974.30 = $51,535.80
The formulas used can be seen in the image below: