Question

A loan is amortized by level annual payments every July 22, plus a smaller final payment one year after the last regular payment. The borrower notices that the interest paid in the July 22, 2010 payment was $200, and the interest paid in the July 22, 2012 payment was $180. The annual effective rate of interest on the loan is 4%. Find the amount of principal repaid in the July 22, 2010 payment

Answer 1

ANSWER: AS PER GIVEN INFORMATION IN QUESTION PRINCIPAL IS REPAID ANNUAL EQUALLY (LEVEL).

INTEREST ON LOAN IS 4%.

INTEREST IS PAID ON JULY 22, 2010 IS $200.

INTEREST = OUTSTANDING BALANCE OF LOAN * RATE OF INTEREST

$200 = OUTSTANDING BALANCE OF LOAN * 4/100

$200 / 4*100 = $5000.(OUTSTANDING BALANCE OF LOAN ON JULY 22, 2010)

INTEREST PAID ON INSTALLMENT JULY 22, 2012 IS $180.

$180 / 4 * 100 = $4500 OUTSTANDING BALANCE OF LOAN ON JULY 22, 2012.

NOW YOU CAN SEE THE DIFFERENCE OF OUTSTANDING BALANCE OF PRINCIPAL AMOUNT OF 2 YEARS IS: $5000 - $4500 = $500.

IT MEANS BORROWER HAS REPAID $500 PRINCIPAL IN 2 YEARS.

SO PER YEAR PAYMENT OF PRINCIPAL IS : $500 / 2 = $250.

$250 IS REPAID BY THE BORROWER EACH YEAR AS PRINCIPAL.

SO AS PER REQUIREMENT OF THE QUESTION PRINCIPALAMOUNT REPAID ON JULY 22, 2010 IS $250.

AND INTEREST IS $200.