Question

1) i. What is an amortizing loan?

A) A loan in which the borrower only pays principal.

B) A loan in which portions of both principal and interest are paid in every period.

C) A loan in which the interest portion of payments increase over time while the principal decreases.

D) A loan in which the borrower pays interest once the principal balance is depleted.

ii) What is the payment on a 60-month, $10000 car loan with APR of 9.13%? Please round to the penny.

iii) In the first payment on a 60-month, $10000 car loan with APR of 7.16%, how much pays off the principal? Round to the penny.

Answer 1

(1) (i) An amortizing loan is one in which the periodic repayments comprise of both principai and interest. In other words, every periodic repayment pays off a portion of the principal along with the interest due over that period.

Hence, the correct answer is (B)

(ii) Loan = $ 10000, Tenure = 60 months, APR = 9.13 %

Monthly Interest Rate = (9.13/12) = 0.76083 %

Let the monthly payments be $ P

Therefore, 10000 = P x (1/0.0076083) x [1-{1/(1.0076083)^(60)}]

P = 10000 / 48.02731 = $ 208.2149 ~ $ 208.21

(iii) Interest Accrued at the end of First Month = Beginning of Period Loan x Monthly Interest Rate = 10000 x 0.0076083 = $ 76.083

Monthly Repayment = $208.21

Principal Repaid = Monthly Repayment - Interest Accrued = 208.21 - 76.083 = $ 132.13