It’s the Principal that Matters Suppose you borrow $10,000. You are going to repay the loan by making equal annual payments for five years. The interest rate on the loan is 14 percent per year. Prepare an amortization schedule for the loan. How much interest will you pay over the life of the loan?

Question

Accepted Answer

We first need to calculate the annual payment. With a present value of $10,000, an interest rate of 14 percent, and a term of five years, the payment can be determined from:

$10,000 = Payment × [latex]{[1 - (1/1.14^{5})]/.14}[/latex]

= Payment × 3.4331

Therefore, the payment is $10,000/3.4331 = $2,912.84 (actually, it’s $2,912.8355; this will create some small rounding errors in the following schedule). We can now prepare the amortization schedule as follows:

Year	Beginning Balance	Total Payment	Interest Paid	Principal Paid	Ending Balance
1	$10,000.00	$2,912.84	$1,400.00	$1,512.84	$8,487.16
2	8,487.16	2,912.84	1,188.20	1,724.63	6,762.53
3	6,762.53	2,912.84	946.75	1,966.08	4,796.45
4	4,796.45	2,912.84	671.50	2,241.33	2,555.12
5	2,555.12	2,912.84	357.72	2,555.12	0.00
Totals		$14,564.17	$4,564.17	$10,000.00

Question 6.SP.5: It’s the Principal that Matters Suppose you borrow $10,000. ...

This Question has been Answered.

Already have an account?

Login

Related Answered Questions