Question

In order to purchase another truck, Beatty Transport recently obtained a $50,000 loan for five years at 7.8% compounded semiannually.

a. What are the monthly payments on the loan?

b. What will be the loan’s balance at the end of the second year?

c. The company expects to be able to sell the truck at the end of 2 years and pay the balance of the loan. What should the monthly payments be so that the value of loan at the end of the first 2 years is $30,000?

Answer 1

Interest rate of 7.8% compounded semi annually is equivalent to Effective Annual rate of 7.9521%   as follows:

Part (a):

Monthly payments are $ 1,012.67   as follows:

Part (b):

Loan balance at the end of second year= $32,339.05 as shown in the relevant portion of amortization schedule below:

Part (c):

Monthly payments required so that the balance at the end of 2 years will be $30,000 is ascertained at $1,102.91 using the PMT function of Excel as follows: