Question

Set up an amortization schedule for a $25000 loan to be repaid in equal installment at the end of each 3 years. The interest rate is 10% compounded annually. What percentage of the payment represents interest and what percentage represents principal for each three years?

Answer 1

we must first determine the annual payment:

annual payment = present value / annuity factor

present value = $25,000

PV annuity factor, 10%, 3 periods = 2.4869

annual payment = $25,000 / 2.48685 = $10,052.87

year payment interest paid principal paid ending balance

1 $10,052.87 $2,500 $7,552.87 $17,447.13

2 $10,052.87 $1,744.71 $8,308.16 $9,138.97

3 $10,052.87 $913.90 $9,138.97 $0

in percentages:

year payment interest paid principal paid

1 100% 25% 75%

2 100% 17.36% 82.64%

3 100% 9.09% 90.91%