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A business will take out a 10-year loan of $250,000. The interest rate is 10% per...

A business will take out a 10-year loan of $250,000. The interest rate is 10% per year and the loan calls for equal annual payments. How much principal is paid in the 2nd year?

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Answer #1

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

250,000=Annuity[1-(1.1)^-10]/0.1

250,000=Annuity*6.144567106

Annuity=250,000/6.144567106

=$40686.34872(Approx)

Interest payment for 1st year=$250,000*10%=$25000

Hence Principal repayment for 1st year=(40686.34872-25000)=$15686.34872

Hence balance due at end of first year=(250,000-$15686.34872)=$234,313.6513

Interest repayment for 2nd year=$234,313.6513*10%

$23,431.36513

Hence Principal repayment for 2nd year =$40686.34872-$23,431.36513

=$17254.98(Approx).

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