4-29 Assume that your aunt sold her house on December 31, and to help close the

Question

4-29 Assume that your aunt sold her house on December 31, and to help close the sale she took a second mortgage in the amount of $10,000 as part of the payment. The mortgage has a quoted (or nominal) interest rate of 10%; it calls for payments every 6 months, beginning on June 30, and is to be amortized over 10 years. Now, 1 year later, your aunt must inform the IRS and the person who bought the house about the interest that was included in the two payments made during the year. (This interest will be income to your aunt and a deduction to the buyer of the house.) To the closest dollar, what is the total amount of interest that was paid during the first year?

Explanation / Answer

In this case an interest rate of 5 percent per period for 20 periods because interest is paid semiannually

                  N = 10 ´ 2 = 20.

                  I = 10/2 = 5.

                  PV = -10000.

                  FV = 0.

                  PMT=10000/12.4622(as per PV table 5% for 20 year)

                  PMT = $802.43.

            Amortization table:

                                 Beginning                                                            Payment of       Ending

                  Period         Balance             Payment             Interest            Principal          Balance    

                     1          $10,000.00       $802.43              $500.00             $302.43       $9,697.57

                     2                9,697.57           802.43                484.88

                                                                                         $984.88

                  The interest during the first year, $984.88.

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