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You have just arranged a three-year bank loan for $150,000 at an interest rate of 8% p
You have just arranged a three-year bank loan for $150,000 at an interest rate of 8% p.a. with interest compounded monthly. The loan will be repaid in equal monthly instalments and the first payment will be due one month from today. Assuming end-of-the-month cash flows, the total interest paid in the second month of the loan will be closest to:
Expert Solution
First we calculate Monthly Payments using PMT Function in Excel:
=pmt(rate,nper,-pv,fv)
Here,
PMT = Monthly Payment = ?
Rate = 8%/12
Nper = 3 years*12 month = 36 months
PV = $150,000
FV = 0
Substituting the values in formula:
=pmt(8%/12,36,-150000,0)
PMT or Monthly Payment = $4,700.45
Interest for 1st Month = $150,000*8%/12 = $1,000
Principal repaid in the First Month = $4,700.45 - $1,000 = $3,700.45
Principal Balance at the End of First Month = $150,000-$3,700.45 = $146,299.55
So, Interest for 2nd Month = $146,299.55 * 8%/12 = $975.33
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