qes 4. Which of the following statements regarding a 30-year monthly payment amo
ID: 2680983 • Letter: Q
Question
qes 4. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?Answer The monthly payments will decline over time.
A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.
The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.
Exactly 10% of the first monthly payment represents interest.
.
Explanation / Answer
For a 30-year mortgage, the monthly payments using a amortization table with a nominal interest rate of 10% will be prepared assuming an example. Let us assume Principal = $100,000 Interest rate = 10% Number of years = 5years {Since 30yrs is large we are assuming just 5yrs} First we need to calculate the monthly payments for 5yrs using excel sheet: Step1: Go to excel and click "insert" to insert the function. Step2: Select the "PMT" function as we are finding the monthly payments in this case. Step3: Enter the values as Rate = 10% / 12; Nper = 5*12; PV = 100000; FV = 0 Step4: Click "OK" to get the desired value. The value comes to " $2,124.7" Therefore, the monthly payment value is $2124.7 Now, we should prepare the amortization table for mortgage loan: In the table, column-1 represents number of months. Since we are assuming 5yrs, the number of monthly payments would be (5 * 12 = 60 months) In column-2, the principal amount is shown after every month starting from the first month. In column-3, the interest expense @10% is calculated for each month on the outstnading principal amount. {Column-2 * 10% gives the interest expense for each month} IN column-4, the monthly payment amount is shown which is constant for all the months. In column-5, the amount of principal that is to be deducted each month is shown which is the difference between the Interest expense and the monthly payment amount. {Column-3 - Column-4} Column-6 gives the value of the balance principal which is obtained by deducting the column-5 from Column-2 for each month. From the table it is clearly shown that the dollar amount of principal being paid off each month gets smaller as the loan approaches maturity. In the table, column-1 represents number of months. Since we are assuming 5yrs, the number of monthly payments would be (5 * 12 = 60 months) In column-2, the principal amount is shown after every month starting from the first month. In column-3, the interest expense @10% is calculated for each month on the outstnading principal amount. {Column-2 * 10% gives the interest expense for each month} IN column-4, the monthly payment amount is shown which is constant for all the months. In column-5, the amount of principal that is to be deducted each month is shown which is the difference between the Interest expense and the monthly payment amount. {Column-3 - Column-4} Column-6 gives the value of the balance principal which is obtained by deducting the column-5 from Column-2 for each month. From the table it is clearly shown that the dollar amount of principal being paid off each month gets smaller as the loan approaches maturity. The correct option is 3)Related Questions
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