Final answer:
An amortization schedule for a $71,000 five-year loan with an annual interest rate of 7% requires using the annuity payment formula and can be constructed to show the principal and interest portions of each annual payment. Examples given about simple interest calculations demonstrate interest concepts but differ from amortization which involves compound interest.
Step-by-step explanation:
Amortization Schedule Calculation
To prepare an amortization schedule for a five-year loan of $71,000 with an annual interest rate of 7%, and equal annual payments, we need to use the formula for the annuity payment. The formula for the annual payment (A) given the loan amount (P), the interest rate per period (r), and the number of periods (n) is:
A = P * (r(1+r)^n) / ((1+r)^n - 1)
The total interest paid over the life of the loan can be calculated by subtracting the initial loan amount from the total payments made. The annual payment thus calculated can be used to construct the amortization schedule, showing the breakdown of principal and interest for each year.
Example calculations based on simple interest rates provided in question examples help to understand the interest calculation but differ from amortized loan calculations which involve compound interest and changing balance.
In the case of the provided example questions:
The total amount of interest from a $5,000 loan after three years with a simple interest rate of 6% would be calculated as:
Interest = Principal × rate × time = $5,000 × 0.06 × 3 = $900
The interest rate you charged if you received $500 in simple interest on a loan that you made for $10,000 for five years would be:
Interest = Principal × rate × time; $500 = $10,000 × rate × 5; Rate = $500/( $10,000 × 5) = 1%
These simple calculations are stepping stones to understanding more complex amortization schedules for loans like the one requested.