Question

You borrow $70,000 and arrange to pay off the loan in five equal annual installments.

Payments will be made at the end of each year. The loan interest rate is 7.50 percent.

What percentage of your second year's payment will go toward interest?

	A.	19.5 percent
	B.	17.2 percent
	C.	80.5 percent
	D.	28.7 percent
	E.	25.1 percent

Answer 1

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

70000=Annuity[1-(1.075)^-5]/0.075

70000=Annuity*4.045884902

Annuity=70000/4.045884902

=$17301.53(Approx)

Interest payment for the first year=$70,000*7.5%=$5250

Hence principal paid for the first year=(17301.53-5250)=$12051.53

Hence balance owed after first year=(70,000-12051.53)=$57948.47

Interest paid for second year=$57948.47*7.5%

=$4346.13525

Hence interest payment % =$4346.13525/$17301.53

=25.1%(Approx).