In: Finance
2. Problem 5.22
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LOAN AMORTIZATION Jan sold her house on December 31 and took a $20,000 mortgage as part of the payment. The 10-year mortgage has a 10% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year. a. What is the dollar amount of each payment Jan receives? Round
your answer to the nearest cent. b. How much interest was included in the first payment? Round
your answer to the nearest cent. How much repayment of principal was included? Round your answer
to the nearest cent. How do these values change for the second payment? -Select-IIIIIIIVVItem 4
c. How much interest must Jan report on Schedule B for the first
year? Round your answer to the nearest cent. Will her interest income be the same next year? d. If the payments are constant, why does the amount of interest income change over time? -Select-IIIIIIIVVItem 7
|
1.
$1,604.85
2.
$1,000.00
3.
$604.85
4.
The portion of the payment that is applied to interest declines,
while the portion of the payment that is applied to principal
increases.
5.
$1,969.76
6.
Her interest income will decline in each successive year.
7.
As the loan is amortized (paid off), the beginning balance, hence
the interest charge, declines and the repayment of principal
increases.
Payment | Loan beginning balance | Payment | Interest payment | Principal payment | Loan ending balance |
1 | 20000 | $1,604.85 | $1,000.00 | $604.85 | $19,395.15 |
2 | $19,395.15 | $1,604.85 | $969.76 | $635.09 | $18,760.05 |
3 | $18,760.05 | $1,604.85 | $938.00 | $666.85 | $18,093.20 |
4 | $18,093.20 | $1,604.85 | $904.66 | $700.19 | $17,393.01 |
5 | $17,393.01 | $1,604.85 | $869.65 | $735.20 | $16,657.81 |
6 | $16,657.81 | $1,604.85 | $832.89 | $771.96 | $15,885.85 |
7 | $15,885.85 | $1,604.85 | $794.29 | $810.56 | $15,075.29 |
8 | $15,075.29 | $1,604.85 | $753.76 | $851.09 | $14,224.20 |
9 | $14,224.20 | $1,604.85 | $711.21 | $893.64 | $13,330.56 |
10 | $13,330.56 | $1,604.85 | $666.53 | $938.32 | $12,392.24 |
11 | $12,392.24 | $1,604.85 | $619.61 | $985.24 | $11,407.00 |
12 | $11,407.00 | $1,604.85 | $570.35 | $1,034.50 | $10,372.50 |
13 | $10,372.50 | $1,604.85 | $518.62 | $1,086.23 | $9,286.27 |
14 | $9,286.27 | $1,604.85 | $464.31 | $1,140.54 | $8,145.73 |
15 | $8,145.73 | $1,604.85 | $407.29 | $1,197.57 | $6,948.17 |
16 | $6,948.17 | $1,604.85 | $347.41 | $1,257.44 | $5,690.72 |
17 | $5,690.72 | $1,604.85 | $284.54 | $1,320.32 | $4,370.41 |
18 | $4,370.41 | $1,604.85 | $218.52 | $1,386.33 | $2,984.08 |
19 | $2,984.08 | $1,604.85 | $149.20 | $1,455.65 | $1,528.43 |
20 | $1,528.43 | $1,604.85 | $76.42 | $1,528.43 | $0.00 |