Question

Prepare an amortization schedule for a seven year loan of $90,000. The interest rate is 4% per year, and the loan calls for equal annual payments (see example in book, do not use the monthly amortization schedule from Canvas). Using the information from the amortization schedule (which you must include with your answers), please answer the following questions.

A. How much total interest is paid over the life of the loan?

B. How much interest will be paid during the fifth year (How will the fifth payment be split between principal and interest?

note: you must show supporting work, or describe the numbers you input to your calculator (i.e., enter PMT = 2000; i = 5%; n = 20. Solve for PV = ZZZ).

Answer 1

PVIFA _{4%, n=7} = [ { 1 - ( 1 / 1.04 ) ⁷ } / 0.04 ] = 6.0021

Annual instalment = $ 90,000 / 6.0021 = $ 14,995

Loan Amortization Schedule :  

Year	Annual Payment	Interest	Reduction of Principal	Principal Carrying Value
0				$ 90,000
1	$ 14,995	3,600	11,395	78,605
2	14,995	3,144	11,851	66,754
3	14,995	2,670	12,325	54,429
4	14,995	2,177	12,818	41,611
5	14,995	1,664	13,331	28,280
6	14,995	1,131	13,864	14,416
7	14,995	579	14,416	0

A. Total interest paid over the life of the loan = $ 14,995 x 7 - $ 90,000 = $ 14,965.

B. Interest paid duringthe fifth year : $ 1,664.