Question

Excel Online Structured Activity: Amortization schedule

The data on a loan has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

a. Complete an amortization schedule for a $18,000 loan to be repaid in equal installments at the end of each of the next three years. The interest rate is 12% compounded annually. Round all answers to the nearest cent.

	Beginning			Repayment	Ending
Year	Balance	Payment	Interest	of Principal	Balance
1	$	$	$	$	$
2	$	$	$	$	$
3	$	$	$	$	$

b. What percentage of the payment represents interest and what percentage represents principal for each of the three years? Round all answers to two decimal places.

	% Interest	% Principal
Year 1:	%	%
Year 2:	%	%
Year 3:	%	%

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

Part (a):
R = Interest rate = 12%
N = 3 years
P = Loan Amount = $18,000
Calulation annual Installment amount = [P*R * (1+R)^N] / [(1+R)^N - 1]
			= [$18,000*12% * (1+12%)^3] / [(1+12%)^3 -1]
			= [$2,160 * 1.404928] / 1.404928 -1]
			= $3,034.64448 / 0.404928
			= $7,494.28165
			= $7,494.28
Year	Beginning Balance	Payment	Interest	Repayment of Principal	Ending Balance
A	B	C	D = B*12%	E = C-D	F = B-E
1	18000	7494.282	2160	5334.282	12665.72
2	12665.718	7494.282	1519.8862	5974.39584	6691.322
3	6691.32216	7494.282	802.96	6691.322	0.00
Part (b):
	Installment amount	Interest Amount	Interest as a % of Payment	Principal	Principal as a % of Payment
Year 1	7494.282	2160	28.82%	5334.282	71.18%
Year 2	7494.282	1519.886	20.28%	5974.396	79.72%
Year 3	7494.282	802.96	10.71%	6691.322	89.29%
Part (c ):
Why do these percentages change over time
Option I is correct
I. 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