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.
(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
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