Question

Your company is planning to borrow $100,000 on a 10-year, 16.50% annual payment, fully amortized term loan. What fraction of the payment made at the end of the third year will represent repayment of principal? 40.0% O 21.7% 29.5% 25.3% O 34.3%

Answer 1

PVOrdinary Annuity = C*[(1-(1+i/100)^(-n))/(i/100)]

C = Cash flow per period

i = interest rate

n = number of payments

10000= Cash Flow*((1-(1+ 16.5/100)^-10)/(16.5/100))

Cash Flow = 2107.66

	Annual rate(M)=	yearly rate/1=	16.50%	Annual payment=	2107.66
Year	Beginning balance (A)	Annual payment	Interest = M*A	Principal paid	Ending balance
1	10000.00	2107.66	1650.00	457.66	9542.34
2	9542.34	2107.66	1574.49	533.17	9009.17
3	9009.17	2107.66	1486.51	621.14	8388.03

Where

Interest paid = Beginning balance * Annual interest rate

Principal = Annual payment – interest paid

Ending balance = beginning balance – principal paid

Beginning balance = previous Year ending balance

Principal %age = 621.14/2107.66 = 29.5%