Loan Amortization 1
Suppose a loan of $90,000 is made at an interest rate of 6% compounded annually, Assume the loan is
repaid in 12 annual payments.
a. Find the payment necessary to amortize the loan.
Solution To find the payment, use the formula
PMT=
i PV
1  1  i 
n
In this case,
PV  90000
i  0.06
n  12
Put these values into the formula to give
PMT=
0.06  90000
1  1  0.06 
12
 10, 734.933
b. Calculate the total payments.
Solution If the payments are rounded down, the total payments are 10, 734.93 12  128,819.16 .
Rounding differently will lead to a slightly different result
c.
Find the total amount of interest paid.
Solution The interest paid is
128,819.16  90, 000  38,819.16 . Rounding differently in part b will give a
slightly different result in this part also.