Question

a. Set up an amortization schedule for a $25,000 loan tobe repaid in equal installments

at the end of each of the next 3 years. The interest rateis 10 percent, compounded

annually.

b. What percentage of the payment represents interest andwhat percentage represents

principal for each of the 3 years? Why do thesepercentages change over time?

Answer 1

643-2-2.34P SA: 1810472

a. Given that I = 10%, PV = 25,000 and N = 3

PMT [1 – (1+i)^-n/i] = 25,000

PMT [1 – (1+0.1)^-3/0.1] = 25,000

PMT*2.4869 = 25,000

PMT = 25,000/2.4869

PMT= 10052.87

Year	Loan	Interest	Installment	Capital Repay	Capital outstanding at the end
1	25000	2500	10052.87	7552.87	17447.13
2	17447.13	1744.713	10052.87	8308.157	9138.973
3	9138.973	913.8973	10052.87	9138.973	0

b. Percentage of Interest Pay

1^st = 2500 / 10052.87 x 100 = 24.87 %

2^nd = 1744.713 /10052.87 x 100 = 17.36 %

3^rd = 913.8973 / 10052.87 x 100 = 9.09 %

Percentage of Capital payment

1^st = 7552.87 / 10052.87 x 100 = 75.13 %

2^nd = 8308.157 / 10052.87 x 100 = 82.64 %

3^rd = 9138.9727 / 10052.87 x 100 = 90.91 %

These percentages changes with time as interest rate declines.