Question

Jan sold her house on December 31 and took a $15,000 mortgage as part of the payment. The 10-year mortgage has a 12% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year. a. What is the dollar amount of each payment Jan receives? Round your answer to the nearest cent. b. How much interest was included in the first payment? Round your answer to the nearest cent. How much repayment of principal was included? Do not round intermediate calculations. Round your answer to the nearest cent. How do these values change for the second payment? I. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal increases. II. The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal decreases. III. The portion of the payment that is applied to interest and the portion of the payment that is applied to principal remains the same throughout the life of the loan. IV. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal also declines. V. The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal also increases. -Select- c. How much interest must Jan report on Schedule B for the first year? Do not round intermediate calculations. Round your answer to the nearest cent. Will her interest income be the same next year? -Select- d. If the payments are constant, why does the amount of interest income change over time? I. As the loan is amortized (paid off), the beginning balance, hence the interest charge, increases and the repayment of principal increases. II. As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal increases. III. As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal declines. IV. As the loan is amortized (paid off), the beginning balance, hence the interest charge, increases and the repayment of principal declines. V. As the loan is amortized (paid off), the beginning balance declines, but the interest charge and the repayment of principal remain the same. -Select-

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Pictures . в с D E Loan Amount Term in years Payment interval Annual interest rate Semi-annual interest rate No. of payments $15,000.00 10 semi-annual 12.00% 6.00% 20 a. Semi-annual payment amount $1,307.77 b. Interest paid in first payment Principal paid in first payment $900.00 $407.77 11 12 13 14 15 Interest paid in second payment Principal paid in second payment $875.53 $432.23 16 Values change for second payment. I. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal increases. Interest income to be reported in first year $1,775.53 Interest income next year Her interest income will decline in each successive year. 26 28 d. Why interest income change over time? 11. As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal increases. 29 30

Cell reference -

C DEL Loan Amount Term in years Payment interval Annual interest rate Semi-annual interest rate No. of payments 15000 10 semi-annual 0.12 =C5/2 =C3*2 9 a. Semi-annual payment amount =PMT(C6,C7,-C2,,0) 11 b. Interest paid in first payment 12 Principal paid in first payment =IPMT(C6,1,C7,-C2,,0) =PPMT(C6,1,C7,-C2,,0) Interest paid in second payment Principal paid in second payment =IPMT(C6,2,C7,-C2,,0) =PPMT(C6,2,C7,-C2,,0) Values change for second payment. I. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal increases * Interest income to be reported in first year =C11+C14 Interest income next year Her interest income will decline in each successive year. 27 d. Why interest income change over time? 11. As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal increases. 28 29 30 32

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.