Question

.In order to buy a new car, you got 65,000$ credit from your local bank. According to the loan agreement, you will payback this loan in 5 equal installments. If the bank charges 9% interest rate, what is the “principal paid” for the year 2?

Answer 1

First we need to find installment amount

Installment = Loan amount/PVIFA(r%,n)

r = rate of interest = 9%

n = no of years = 5 years

Loan amount = 65000 $

PVIFA(r%,n) = [1-(1/(1+r)^n / r ]
PVIFA(9%,5) = [1-(1/(1+9%)^5 / 9%]
=[1-(1/(1+0.09)^5 / 0.09]
=[1-(1/(1.09)^5 / 0.09]
=[1-0.6499 / 0.09]
=0.35006/0.09
=3.8897

Thus Installment amount = 65000/3.8897

= 16710.80 $

Statement showing repayment schedule

			Towards
Year	Opening balance	Installment	Interest @ 9%	Principal	Closing balance
1	65000.00	16710.80	5850.00	10860.80	54139.20
2	54139.20	16710.80	4872.53	11838.27	42300.93
3	42300.93	16710.80	3807.08	12903.72	29397.21
4	29397.21	16710.80	2645.75	14065.05	15332.16
5	15332.16	16710.80	1379.89	15332.17	0.00

Thus  principal paid” for the year 2 = 11838.27 $