Question

Please create a Variable Interest Rate Loan Amortization schedule with the columns: Year, Amount owed on the principal at the beginning of the year, Annuity payment, Interest portion of the annuity, Repayment of the principal portion of the annuity, outstanding loan balance at year end

For the following:

You obtain a $6,000 loan from a furniture dealer at a variable interest rate. The loan payments is adjusted every year based on the annuity amount implied by interest rate of year t. The realized loan interest rates in the year 1,2,3,4 are 12%, 15%, 9% and 10% respectively. Determine the annual payments on this loan and complete the amortization table (payment is applied first to interest then to principal, zero balance at the end)

Key intuition,

Year 1, PMT is computed as an annuity assuming n=4, and i=12%

Year 2, PMT is computed as an annuity assuming n=3, and i=15%

Year 3, PMT is computed as an annuity assuming n=2, and i=9%

Year 4, PMT is computed as an annuity assuming n=1, and i=10%

Answer 1