Question

On January 1, 2020, a borrower signed a long-term note, face amount, $40,000; time to maturity,...

On January 1, 2020, a borrower signed a long-term note, face amount, $40,000; time to maturity, three years; stated rate of interest, 8%. The market rate of interest of 10% determined the cash received by the borrower. The note will be paid in three equal annual installments of $15,521 each December 31 (which is also the end of the accounting period for the borrower).

Required

a. Compute the cash received by the borrower and prepare a debt amortization schedule.

  • Note: Round your answer to the nearest whole dollar.

1. Compute the cash received by the borrower.

2. Prepare a debt amortization schedule.

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Answer #1

Face Value of loan Coupon rate of interest Market rate of interest Installment value 40,000 8% 10% 15,521

Year 1 year 2 year 3 year PV factor Amount of instalment Total 0.9091 15,521 14, 110 0.8264 15,521 12,827 0.7513 15,521 11,66

2) Debt amortization schedule Year Opening Value of loan Interest Principal Installment Closing value of loan 10% of opening

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