advertisement

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.