Question

LOAN AMORTIZATION

Jan sold her house on December 31 and took a $30,000 mortgage as part of the payment. The 10-year mortgage has a 12% 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.

1. What is the dollar amount of each payment Jan receives? Round your answer to the nearest cent.
$  

2.How much interest was included in the first payment? Round your answer to the nearest cent.
$  

3.How much repayment of principal was included? Round your answer to the nearest cent.
$  

4.How do these values change for the second payment?

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

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

c.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.

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

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

5.How much interest must Jan report on Schedule B for the first year? Round your answer to the nearest cent.

6.Will her interest income be the same next year?
a.Her interest income will increase in each successive year.

b.Her interest income will remain the same in each successive year.

c.She will not receive interest income, only a return of capital.Her interest income will decline in each successive year.

d.She will receive interest only when the mortgage is paid off in 10 years.

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

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

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

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

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

e.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

1-	Dollar amount of each payment	Using PMT function in MS excel	PMT(rate,nper,pv,fv,type) rate = 12%/2 = 6% nper = 10*2 =20 pv = 30000 fv =0 type =0	PMT(6%,20,30000,0,0)	($2,615.54)
2-	Interest in First payment	amount borrowed*interest rate	30000*6% = 1800	1800
3-	repayment of principal	Semiannual payment-interest charge	2615.54-1800	815.54
4-	Answer is A	The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal increases.
5-	Semiannual payment	beginning year balance	Dollar amount of each payment	Interest Portion	principal amount	period end balance
	31-Dec					30000
	30-Jun	30000	2615.54	1800	815.54	29184.46
	31-Dec	29184.46	2615.54	1751.0676	864.4724	28319.99
	Interest to be reported			3551.0676
6-	Her interest income will decline in each successive year.
7-	Answer is B	As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal increases.