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.

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