Question

Jan sold her house on December 31 and took a $15,000 mortgage as part of the payment. The 10-year mortgage has a 7% 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?

I. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal increases.

II. The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal decreases.

III. The portion of the payment that is applied to interest and the portion of the payment that is applied to principal remains the same throughout the life of the loan.

IV. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal also declines.

V.The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal also increases.

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?   

I. interest will increase in each successive year

II. interest will remain the same in each successive year

III. receive no interest in each successive year only return of capital

IV. interest will decline in each successive year

V. receive interest only after 10 years mortgage paid off.

d. If the payments are constant, why does the amount of interest income change over time?

I. As the loan is amortized (paid off), the beginning balance, hence the interest charge, increases and the repayment of principal increases.

II.As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal increases.

III. As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal declines.

IV. As the loan is amortized (paid off), the beginning balance, hence the interest charge, increases and the repayment of principal declines.

V.As the loan is amortized (paid off), the beginning balance declines, but the interest charge and the repayment of principal remain the same.

Answer 1

a. MONTHS EMI INTEREST PRINCIPAL REPAYMENT OUTSTANDING PRINCIPAL 0 15000 1 797 88 709 14291 2 797 83 713 13577 3 797 79 718 12860 4 797 75 722 12138 5 797 71 726 11412 6 797 67 730 10682 7 797 62 734 9947 8 797 58 739 9209 9 797 54 743 8465 10 797 49 747 7718 11 797 45 752 6966 12 797 41 756 6210 13 797 36 761 5450 14 797 32 765 4685 15 797 27 769 3915 16 797 23 774 3141 17 797 18 778 2363 18 797 14 783 1580 19 797 9 788 792 20 797 5 792 0
b. $88 and $709 was included as an interest and principal repayment in the first installment respectively. These value change for the second payment : I. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal increases. c. $171 should be included as an interest in first year. IV. interest will decline in each successive year. d. II.As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal increases.