Question

A bank just approved your small business loan for $20,000. The loan has an interest rate of 9.0% and will be repaid with 10 end-of-year payments. What is the required annual loan payment?

a. $2,980.59

b. $3,116.40

c. $3,981.65

d. $4,271.33

e. $3,254.91

Halfway through the loan's life, what is the loan’s remaining balance?

a. $17,513

b. $13,339

c. $15,288

d. $12,122

e. $11,901

What percentage of the total payments made during the first five years will be made toward interest?

a. 45.66%

b. 51.22%

c. 49.44%

d. 52.93%

e. 41.53%

Answer 1

1]

Required annual loan payment is calculated using PMT function in Excel

rate = 9%

nper = 10

pv = 20,000

PMT is calculated to be $3116.40

2]

The cumulative principal repaid after 5 payments are completed is calculated using CUMPRINC function in Excel

rate = 9%

nper = 10

pv = 20000

start period = 1

end period = 5

type = 0 (since payments are made at the end of each year)

CUMPRINC is calculated to be $7878.28.

balance remaining on loan = $20,000 - $7,878.28 = $12,121.72

3]

The total interest paid after 5 payments are completed is calculated using CUMIPMT function in Excel

rate = 9%

nper = 10

pv = 20000

start period = 1

end period = 5

type = 0 (since payments are made at the end of each year)

CUMIPMT is calculated to be $7,703.73

% paid towards interest = $7,703.73 / ($3,116.40 * 5) = 49.44%