Question

6. Best Boots is planning to purchase a new commercial sewing machine for $105,000. They plan to finance the sewing machine through a loan at 6.5% APR compounded bi-weekly (every 2 weeks) over 10 years. (8 points) a) What is the bi-weekly loan payment? b) How much interest will be paid over the 10 years of the loan? c) How much of the first payment is used to pay down the loan, rather than pay interest?

Answer 1

a)

The bi-weekly payment on the loan is calculated using the following equation

Present value of the loan PMT = 1- (1+ interest rate) interest rate -nt

$105,000 PMT -26x10 0.065 1-(1+º 26 0.065 26

Bi-weekly loan payment = $ 549.70

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b)

Interest paid over 10 years of the loan = $ 549.70 $\times$ 26 $\times$ 10 - $ 105,000

Interest paid over 10 years of the loan = $37,922.78

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c)

The amortization schedule for the first loan payment is shown as

$ 287.20 of the first payment is used to pay down the loan, rather than pay interest.

Period	Beginning balance	Bi-weekly payment	Interest	Principal	Ending balance
1	$105,000	$549.70	(0.065 $\div$ 26) $\times$ $ 105,000 = $ 262.50	$ 549.70 - $ 262.50 = $ 287.20	$105,000 - $287.20 = $104,712.80