Question

Amortization schedule. Chuck Ponzi has talked an elderly woman into loaning him $45,000 for a new business venture. She has, however, successfully passed a finance class and requires Chuck to sign a binding contract on repayment of the $45,000 with an annual interest rate of 7% over the next 5 years. Ponzi may choose to pay off the loan early if interest rates change during the next 5 years. Determine the ending balance of the loan each year under the three different payment plans: a. the discount loan b. the interest-only loan c. the fully amortized loan. a. If Chuck chooses the discount loan, what is the ending balance of the discount loan in year 1? $ (Round to the nearest cent.)

Answer 1

Loan Amount - $45,000

Interest rate - 7%

Tenure 5 Years or 60 months.

The below grid shows the amount outstanding at every year.

Year	Interest	Principal	Balance
1st Year	$          2,903	$        7,789	$                37,211
2nd Year	$          2,340	$        8,353	$                28,858
3rd Year	$          1,736	$        8,956	$                19,902
4th Year	$          1,089	$        9,604	$                10,298
5th Year	$              395	$     10,298	$                          -

The below formula used to calculate the above grid:

A= P * r(1+r)^n/(1+r)^n-1

A = payment Amount per period

P = initial Principal (loan amount)

r = interest rate per period

n = total number of payments or periods

where as p = $45,000, r = 7%, n=60 moths

To calculate how much interest and principal to be paid will be calculated as follows for one month. the same exercise should be carried out to find out for all the 60 months.

= 45,000*0.00587/1.0058333-1 = $ 261.50 which is the payment amount of interest per period

to calculate the monthly principal and interest we have to use equated monthly installments formula

pmt(r*n*p) , where as p = $45,000, r = 7%, n=60 moths

7%*60*45,000=$891.05

Deduct Interest of $261.5 to see the principal amount to be paid on a monthly basis.

Grid to show Interest only payment:

In this scenario no principal payment made and the amount interest amount of $262.50 has been paid every month.

Interest Only
Year	Interest	Principal	Balance
1st Year	$          3,150	$               -	$                45,000
2nd Year	$          3,150	$               -	$                45,000
3rd Year	$          3,150	$               -	$                45,000
4th Year	$          3,150	$               -	$                45,000
5th Year	$          3,150	$               -	$                45,000
	$        15,750		$                45,000
	Total Payable		$                60,750