Question

On January 1 , a company borrowed $70000 cash by signing a 9% installment note that is to be repaid with 4 annual-end payment of $21607. While the amount borrowed equals $70000 , the total payment on this note amount to $86428. Explain

Answer 1

86,428 - 70,000 = $16,428

This difference of $16,428 refers to the 9% interest that was paid over the 4 years. However, the 9% is only charged on the amount that is owed whch reduces every year by a principal repayment which also comes out of the $21,607.

Year 1

Payment = $21,607

Interest = 9% * 70,000 = $6,300.

Principal repayment = 21,607 - 6,300= $15,307

Amount left to be paid = 70,000 - 15,307 = $54,693

Year 2

Payment = $21,607

Interest = 9% * 54,693 = $4,922.37

Amount left to be paid = 54,693 - (21,607 - 4,922.37) = $38,008.37

Year 3

Payment = $21,607

Interest = 9% * 38,008.37 = $3,420.75

Amount left to be paid = 38,008.37 - (21,607 - 3,420.75) = $19,822.12

Year 4

Payment = $21,607

Interest = 9% * 19,822.12 = $1,783.99

Amount left to be paid = 19,822.12 - (21,607 - 1,783.99) = $0

Interest Year 1 - 4 = 6,300 + 4,922.37 + 3,420.75 + 1,783.99

= $16,427.11 (difference due to rounding errors)