1Two loans are for the same amount at the same interest one is paid off in 10 ye

Question

1Two loans are for the same amount at the same interest one is paid off in 10 years and the other in 25 years. a) Which loan results in more of each payment being rate; directed toward principal? Explain. (b) Which loan results in a lower periodic payment? Explain. 2. When a debt is amortized, which interest rate is better for the borrower, 10% or 6%? Explain. 3. A debt of $8000 is to be amortized with 8 equal semiannual payments. If the interest rate is 12%, compounded semiannually, what is the size of each payment?

Explanation / Answer

1)

10 Year loan, has more payment towards principal

25 Year loan has lower payments because of longer tenure

2)

For borrower lower interest rate is always better

Hence 6% is better

3)

PMT = PV*r / (1 - (1+r)-n)

r = 12%/2 = 6%

n = 8, PV = 8000

PMT = 8000*6% / (1 - (1+6%)-8)

= 1288.288

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