Suppose you borrow $10,000. You are going to repay the loan by making equal a...

Question:

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?

Amortization Schedule:

Loan amortization is the repayment of the money borrowed over the life period of the loan. In addition to the principal repayment, the borrower also makes payments toward the interest charged on the unpaid loan amount. The amortization schedule is a table prepared to indicate how the periodic payments are distributed towards interest payment, principal payment and also provide information on the outstanding loan balance.

Answer and Explanation:

Loan = $10,000.

n = 5 years.

r = 14%

Calculate the annual payments

<span id="MathJax-Element-1-Frame" class="mjx-chtml MathJax_CHTML" tabindex="0" data-mathml="&#xA0ayment=Loan&#x2217;r1&#x2212;(1+r)&#x2212;n=10,000&#x2217;0.141&#x2212;(1+0.14)&#x2212;5=1,4000.480631336=$2,912.84" role="presentation" style="box-sizing: border-box; display: inline-block; line-height: 0; font-size: 16.8px; overflow-wrap: normal; word-spacing: normal; white-space: nowrap; float: none; direction: ltr; max-width: none; max-height: none; min-width: 0px; min-height: 0px; border: 0px; padding-top: 1px; padding-bottom: 1px; position: relative;"> Payment=Loan∗r1−(1+r)−n=10,000∗0.141−(1+0.14)−5=1,4000.480631336=$2,912.84 Payment=Loan∗r1−(1+r)−n=10,000∗0.141−(1+0.14)−5=1,4000.480631336=$2,912.84

The formulas applied to fill the remaining columns of the amortization schedule are;

• Interest paid = Interest rate * Beginning loan balance
• Principal paid = Annual payments - Interest paid
• Ending loan balance = Beginning loan balance - Principal paid
  

Amortization schedule

Year	Beginning	Payment	interest	Principal	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
Total		14,564.18	4,564.18	10,000.00

The interest you will pay over the life of the loan is $4,564.18