Problem 5-34 Amortization schedule Set up an amortization schedule for a $10,000

Question

Problem 5-34
Amortization schedule

Set up an amortization schedule for a $10,000 loan to be repaid in equal installments at the end of each of the next 3 years. The interest rate is 6% compounded annually. Round all answers to the nearest cent.

What percentage of the payment represents interest and what percentage represents principal for each of the 3 years? Round all answers to two decimal places.

Why do these percentages change over time?

a) These percentages change over time because even though the total payment is constant the amount of interest paid each year is declining as the balance declines.

b) These percentages change over time because even though the total payment is constant the amount of interest paid each year is increasing as the balance declines.

c) These percentages change over time because even though the total payment is constant the amount of interest paid each year is declining as the balance increases.

d) These percentages change over time because even though the total payment is constant the amount of interest paid each year is increasing as the balance increases.

e) These percentages do not change over time; interest and principal are each a constant percentage of the total payment.

Beginning Remaining Year Balance Payment Balance 1 $   $   $   2 $   $   $   3 $   $   $  

Explanation / Answer

Annual Payment will be 3741 per year

Answer (1)

Answer(2)

Answer(3) a These percentages change over time because even though the total payment is constant the amount of interest paid each year is declining as the balance declines

these percentages change over time

Present Value of Loan (PV)=10000 Period (n)= 3years Interest (i)= 6% PV Ordinary Annuity = A*((1-(1+i)^(-n))/i) 10000 = A*((1-(1+0.06)^(-3))/0.06) A=10000/((1-(1+0.06)^(-3)/0.06 A=10000/2.673011949 A=3741

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