Question

In: Finance

a. Complete an amortization schedule for a $37,000 loan to be repaid in equal installments at...

a. Complete an amortization schedule for a $37,000 loan to be repaid in equal installments at the end of each of the next three years. The interest rate is 11% compounded annually. Round all answers to the nearest cent.

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.

c. Why do these percentages change over time? 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. 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. 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. 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. These percentages do not change over time; interest and principal are each a constant percentage of the total payment.

Solutions

Expert Solution

Excel formula to calculate amortisation table:

A B C D E F
1 Amortisation Schedule
2
3 Loan Amount to be repaid(PV) 37000
4 Interest Rate(r) 11%
5 Length of loan (in years) 3
6
7 a. Setting up Amortization table Formula
8 Calculation of loan payment $15,140.88 PMT(B4,B3,-B2)
9
10 Years Beginning Balance PMT =PMT(11%,3,-37000) Interest part of PMT Principal part of PMT= PMT-Interest Ending Balance
11 1.00 37000.00 15140.88 4070.00 11070.88 25929.12
12 2.00 25929.12 15140.88 2852.20 12288.68 13640.44
13 3.00 13640.44 15140.88 1500.45 13640.44 0.00
14
15 B. Calculating % of Payment Representing Interest and Principal of Each Year
16 % Interest % Principal Check Total=100%
17 Year 1 26.88% 73.12% 100%
18 Year 2 18.84% 81.16% 100%
19 Year 3 9.91% 90.09% 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 Representung 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.   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.


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