Question

Amortization with Equal Payments [LO3] Prepare an amortization schedule for a five-year loan of $71,500. The interest rate is 7 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year? How much total interest is paid over the life of the loan?

Answer 1

Amount borrowed = $71,500
Number of payments = 5
Interest rate = 7%

Let annual payment be $x

$71,500 = $x/1.07 + $x/1.07^2 + $x/1.07^3 + $x/1.07^4 + $x/1.07^5
$71,500 = $x * (1 - (1/1.07)^5) / 0.07
$71,500 = $x * 4.100197
$x = $17,438.18

Annual payment = $17,438.18

Year Beginnig Loan Outstanding $ 71,500.00 $ $ 59,066.82 $ $ 45,763.32 $ $ 31,528.57 $ $ 16,297.39 $ $ Repayment of Ending Loan Cash Paid Interest Paid Principal Outstanding 17,438.18$ 5,005.00 $ 12433.18 $ 59,066.82 17,438.18 $ 4,134.68 $ 13,303.50 $ 45,763.32 17,438.18 $ 3,203.43 $ 14,234.75 $ 31,528.57 17,438.18 $ 2,207.00 $ 15,231.18 $ 16,297.39 17,438.18 $ 1,140.79$ 16,297.39 $ 87,190.90 $ 15,690.90 Total

Interest pad in third year = $3,203.43
Total interest paid over the life of the loan = $15,690.90