Question

5. You have a $ 6,000 loan to be repaid in 5 years (annual payments) at a 7% interest rate. Create an amortization schedule for a fully amortized loan with constant-payment installments.

Answer 1

First let's calculate the PMT( annual installmets which are fixed ) of the loan payments :

$6000 = pv

7% = i/y

5 = n

therefore, the PMT = $1463.

so we will be paying a fixed amount of $1463 every year.

the amortization schedule is as follows,

year pmt interest payment towards principal balance remaining amount in the loan

1 $1463 420 1043 $4957 ( interest payment= 0.07* 6000 )

2 $1463 347 1116 $3841 ( interest payment = 0.07 * 4957)

3 $1463 269 1194 $2646 ( interest payment = 0.07* 3841)

4 1463 185 1277 1368

5. 1463 95.7 1367 ----- (interest amount = 0.07*1368)

the annual installment consists of principal and interest amount, of which $420 is paid towards interest . subtracting interest amount from the annual installments , payment towards principal is made. which reduces the amount of the loan and diminishes the amount as a result in the last year we are left with zero.