Question

. Ali borrowed Rs.550,000 from a bank on terms of 12 year, 10% nominal interest rate. The loan calls for quarterly payments. a) Calculate the amount of quarterly payment you would be paying every period? b) How much is the total amount of interest that Ahmed has paid in two years? What is the ending balance of principal after two years?

Answer 1

Part a)

where, P=principal =$550,000; n=Number of quarterly payment = 12years*4 = 48quarters; r=interest rate per quarter = 10%/4 =2.5%

Amount of quarterly payment = $550,000*2.5%*[(1+0.025)^48]/{[(1+0.025)^48]-1}

= 13750*(1.025^48)/[(1.025^48)-1]

= 13750*3.2714895607/2.2714895607

= $19,803.30

Part B)

Constructed repayment schedule:

Quarter (i)	Outstanding at the beginning of the quarter (ii)	Interest (iii) =(ii)*2.5%	Repayment (iv) (refer part a)	Outstanding at the end of the quarter (v)=(ii)+(iii)-(iv)
1	550,000	13,750	19,803	543,947
2	543,947	13,599	19,803	537,742
3	537,742	13,444	19,803	531,382
4	531,382	13,285	19,803	524,864
5	524,864	13,122	19,803	518,182
6	518,182	12,955	19,803	511,333
7	511,333	12,783	19,803	504,313
8	504,313	12,608	19,803	497,118
		105,544

Total amount of interest paid in 2years = $105,544

Ending balance of principal after 2 years = $497,118