In: Finance
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.
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.