Question

unpaid balance 42000
time 5
interest 12%
capitalization 1


How much interest would be paid in year 2?

Answer 1

Unpaid Balance = PV = 42,000

n = 5

r = interest rate = 12%

Annual Installment = [r*PV] / [1 - (1+r)^-n]

= [12%*42,000] / [1 - (1+12%)^-5]

= 5,040 / 0.432573144

= 11,651.2088

Annual Installment is 11,651.21

Interest paid in Year 1 = Unpaid Balance * Interest rate = 42,000 * 12% = $5,040

Unpaid balance at the end of year 1 = Unpaid balance + Interest paid - annual installment

= 42,000 + 5,040 - 11,651.21

= 35,388.79

Interest paid in Year 2 = Unpaid balance at the end of year 1 * Interest rate

= 35,388.79 * 12%

= 4,246.6548

Therefore, Interest would be paid in Year 2 is 4,246.65