Question

Today you borrow $25,000 from your local bank. The stated interest rate is 10%, compounded annually. It will be a 5 year loan. You will pay back the loan at the end of each of the next five years.

A) What will be your annual payment be for the next five years.   

B) How much of your first payment is going toward interest?

C) What is the outstanding principle balance after you make the first payment?

D) How much of your second payment is going toward interest?
E) What is the outstanding principle balance after you make the second payment?

Show all work on A, B, C, D, E

Answer 1

Present value of Annuity = A*[(1-(1+r)^-n)/r]

Where

A - Annuity payment = ?

r - rate per period = 10%

n - no. of periods = 5

25000 = A* [(1-(1.1^-5))/.1]

= A* [(1-0.62092132305)/.1]

A*3.7907867695

A = 25000/3.7907867695

= $6594.94

Year	Opening Balance	Total Payment	interest paid	principal paid	end balance
1	25000.00	6594.94	2500.00	4094.94	20905.06
2	20905.06	6594.94	2090.51	4504.43	16400.63

Interest paid = Opening Balance*10%

Principal paid = Total Payment - Interest paid

End balance = Opening Balance - Principal paid