Amortization is a process in which regular payments are made to pay off a liabil
ID: 2730550 • Letter: A
Question
Amortization is a process in which regular payments are made to pay off a liability such as a loan or a home mortgage. These regular payments are considered as annuities that consist of a principal amount and interest. Consider the following case. After Shipra got a job, the first thing she bought was a car. She took out a loan for $30,000, with zero down payment. She agreed to pay off the loan by making annual payments for the next four years at the end of each year. Her bank is charging her an interest rate of 8%. You are helping Shipra figure out her annual payments to pay off her loan. Calculate the annual payment and complete the following loan amortization table:Explanation / Answer
Annual Payments = Loan / PVAF(4,8%) = $30,000 / 3.3121 = $9,057.70
Amortisation table
Year
Beginning amount (in $)
Annual payment
Interest
Principal
Ending Balance (in $)
1
30,000
9057.70
2,400
6,657.70
23,342.30
2
23,342.30
9057.70
1,867.38
7,190.32
16,151.98
3
16,151.98
9057.70
1,292.16
7,765.54
8,386.44
4
8,386.44
9057.70
671.28
8,386.42
0.02
Year
Beginning amount (in $)
Annual payment
Interest
Principal
Ending Balance (in $)
1
30,000
9057.70
2,400
6,657.70
23,342.30
2
23,342.30
9057.70
1,867.38
7,190.32
16,151.98
3
16,151.98
9057.70
1,292.16
7,765.54
8,386.44
4
8,386.44
9057.70
671.28
8,386.42
0.02
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