Theory of Interest

Theory of Interest

Amortization: Calculation of Outstanding Balances

Chap 6

Problem #1
Chapter 6
Amortization Schedules and Sinking Funds

Bernard borrows $100,000 on January 1, 1993, to be

repaid in 360 monthly installments at a nominal
annual interest rate of 9% convertible monthly. The
first monthly payment is due February 1, 1993.
Bernard misses the first payment, but begins
payments on March 1, 1993, and makes 359
payments. Determine how much Bernard still owes
on the loan after making his 359th payment.

SAMPLE PROBLEMS

A10

Theory of Interest

Amortization: Calculation of Outstanding Balances

Chap 6

Problem #2

Chap 6

Problem #3

A $6,000 loan is being repaid with regular payments

of X at the end of each year for as long as necessary
plus a smaller payment one year after the final
regular payment.
Immediately after the ninth
payment, the outstanding principal is three times the
size of the regular payment (i.e., 3X). If the annual
interest rate i is 10%, what is the value of X?

A14

Theory of Interest

Amortization: Calculating Interest Paid

Equate 3X and the

accumulated value of the
loan amount less the
accumulated value of
payments:

A $10,000 loan is being paid off by annual payments

of $2,000 plus a smaller final payment. If the
effective annual rate of interest is 15% and the first
payment is made one year after the time of the loan,
find the amount of interest contained in the fifth
payment.

B6

Calculate the outstanding

balance after four years and
then the amount of interest
in the next year

Theory of Interest

Amortization: Calculating Interest Paid

Chap 6

Problem #4

Calculate the amount of

each payment and use to
calculate the interest in
the sixth payment:

A $1,000 loan is to be repaid with equal payments at

the end of each year for 20 years. The principal
portion of the 13th payment is 1.5 times the principal
portion of the 5th payment. Calculate the total
amount of interest paid on the loan.

B9

Calculate the interest rate, the

payment amount, and the difference
between the total payments and the
loan amount.

Theory of Interest

Amortization: Calculating Principal Payments

Chap 6

Problem #6

Theory of Interest

Amortization: Calculation of Outstanding Balances

Chap 6

Problem #7

Joe negotiates an eight-year loan which requires him

to pay $1,200 per month for the first four years and
$1,500 per month for the remaining years. The
interest rate is 13%, convertible monthly, and the first
payment is due in one month. Determine the amount
of the principal in the seventeenth payment.

C4

Chap 6

Problem #5

A $3,000 loan at 18% per year is being repaid by ten

equal annual payments, the first payment due one
year after the loan is made. Calculate the interest
part of the sixth payment.

B8

Theory of Interest

Amortization: Calculating Interest Paid

A loan is being amortized by means of level monthly

payments at an annual effective interest rate of 8%.
The amount of principal repaid in the 12th payment is
1,000 and the amount of principal repaid in the tth
payment is 3,700. Calculate t.

Calculate the outstanding

balance after sixteen
payments and the principal
in the seventeenth payment

Theory of Interest

Sinking Funds

Chap 6

Problem #7
Helen borrows $20,000 to be repaid over 15 years with
level annual payments with an annual effective interest
rate of 8%. The first payment is due one year after she
takes out the loan. Helen pays an additional $4,000 at
the end of year 9 (in addition to her normal payment).
At the time (the end of year 9) she negotiates to pay off
the remaining principal at the end of year 14 with a
sinking fund. The sinking fund accumulates at an
annual effective interest rate of 7%. Helen will make
level annual payments. Helen will also make annual
interest payments at an annual effective interest rate of
10%. You may assume all payments are made at the
end of the year. Determine Helens total annual outlay
starting with year 10.
E21