Question

2) You have received a 3-year $10,000 loan from your bank. This is an amortized loan which means you have to make 3 equal annual payments to the bank. The bank is charging you 12% APR (annual percentage rate) for this loan. a. Complete the following amortization schedule. (25 points) Amortization schedule Beginning Balance Annual Payment Interest Balance Reduction year End Balance Expense $10,000 $0.00 How much in total you end up paying back to the bank? (5 points) Assume this loan is a discount loan instead of an amortized loan. How much in total you would end up paying back to the bank? (10 points) b. c.

Answer 1

a.

Amortization schedule is calculated in excel and screen shot provided below:

F5 Payment Towards 1 End of period Beginning balanceAnnual payment Interest Payment Towards Principle outstanding Balance $10,000.00 $7,036.51 $3,717.40 0.00 0 $10,000 $7,037 $3,717 00 $2,963.49 4.38 $3,319.11 $446.09 $3,717.40 $1,200.00 $4,163.49 $4,163.49 $4,163.49 4

b.

Total Payment = $4,163.49 × 3

= $12,490.47.

Total Payment in three year is $12,490.47.

c.

If it is discount loan then total payment = $10,000 / [(1 + 12%) ^ 2] - 1

= $10,000 / 0.728

= $13,736.26

If it is discount loan then total payment is $13,736.26.