Question

Paulo borrowed $15,000 at a 14% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, end-of-year payments.
a) Calculate the annual, end-of-year loan payment.
b) Prepare a loan amortization schedule showing the interest and principal breakdown of
each of the three loan payments.
c) Explain why the interest portion of each payment declines with the passage of time.

Answer 1

Instalment = Loan / PVAF (r%, n)

r - Int rate per anum

n - No. of years

= $ 15000 / PVAF(14%, 3)

= $ 15000 / 2.3216

= $ 6460.97

Part B:

Loan AMortization:

Year	Opening Bal	Instalment	Int	Principal repay	Clsoing Bal
1	$ 15,000.00	$ 6,460.97	$ 2,100.00	$ 4,360.97	$ 10,639.03
2	$ 10,639.03	$ 6,460.97	$ 1,489.46	$ 4,971.51	$   5,667.52
3	$   5,667.52	$ 6,460.97	$    793.45	$ 5,667.52	$               -

Part C:

As the Outstanding balance is reducing for each year, Int portion in instalment will also reduce.