Question

Your bank offers to lend you $114,400 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?

Answer 1

The interest paid in Year 2 would be $8,735.60.

Step-by-step explanation:

To calculate the interest paid in Year 2, we need to first calculate the annual payment amount. The loan has 10 equal end-of-year payments, so the annual payment amount is $114,400 divided by 10, which is $11,440.

In Year 1, since it is the first payment, the entire payment goes towards the interest. So, in Year 1, the interest paid would be $11,440 multiplied by the interest rate of 8.5%, which is $973.40.

In Year 2, the remaining balance after Year 1 is $114,400 minus $11,440, which is $102,960. The interest paid in Year 2 is $102,960 multiplied by the interest rate of 8.5%, which is $8,735.60.