Question

Consider a 4-year amortizing loan. You borrow $2,700 initially and repay it in four equal annual year-end payments. a. If the interest rate is 10%, what is the annual payment? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Annual payment b. Prepare an amortization schedule. (Do not round intermediate calculations. Round your answers to 2 decimal places. Leave no cells blank-be certain to enter "O" wherever required.) Year-End Interest DueTotal Year-End Amortization on Loan Balance ($) Loan Balance (S) Time of Loan ($ Payment ($) 0 2,700.00 1 2 3

Answer 1

a.	Annual payment	=	Loan amount	/	Present value of annuity of 1
		=	$ 2,700.00	/	3.169865
		=	$     851.77
	Working:
	Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
		=	(1-(1+0.10)^-4)/0.10		i	=	10%
		=	3.1698654		n	=	4
b.	Amortization Schedule:
	Time	Loan balance	Year end interest due on Loan Balance	Total Year end payments	Amortization of Loan
	0	$ 2,700.00	0	0	0
	1	$ 2,118.23	$     270.00	$ 851.77	$ 581.77
	2	$ 1,478.28	$     211.82	$ 851.77	$ 639.95
	3	$     774.34	$     147.83	$ 851.77	$ 703.94
	4	$         0.00	$       77.43	$ 851.77	$ 774.34
	Working:
	Year end	Beginning loan	Interest expense
		a	b=a*10%
	1	$ 2,700.00	$     270.00
	2	$ 2,118.23	$     211.82
	3	$ 1,478.28	$     147.83
	4	$     774.34	$       77.43
	Amortization of loan	=	Year end total payment	-	Interest expense