Question

Problem 4-30
Loan Amortization

Your company is planning to borrow $3 million on a 7-year, 11%, annual payment, fully amortized term loan. What fraction of the payment made at the end of the second year will represent repayment of principal? Round your answer to two decimal places.

%

Answer 1

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

3,000,000=Annuity[1-(1.11)^-7]/0.11

3,000,000=Annuity*4.712196265

Annuity=3,000,000/4.712196265

=$636,645.81(Approx)

Interest payment for the 1st year=$3,000,000*11%=$330,000

Hence principal repayment for 1st year=$636,645.81-$330,000

=$306645.81

Hence balance owed at end of 1st year=(3,000,000-$306645.81)=$2,693,354.19

Hence interest paid for 2nd year=$2,693,354.19*11%=$296,268.96(Approx)

Hence principal repaid for 2nd year=$636,645.81-296,268.96=$340,376.85

Hence fraction of payment representing principal=$340,376.85/$636,645.81

=53.46%(Approx).