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Homework answers / question archive / $14,000 loan at 6% compounded monthly is repaid by monthly payments over four years
$14,000 loan at 6% compounded monthly is repaid by monthly payments over four years.
a. What is the size of the monthly payment? (ANSWER IS $291.70)
b. Calculate the principal portion of the 25th payment. (ANSWER IS 328.79)
a) Computation of Size of Monthly Payment using PMT Function in Excel:
=pmt(rate,nper,-pv,fv)
Here,
PMT = Monthly Payment = ?
Rate = 6%/12 = 0.50%
Nper = 4 years * 12 months = 48 months
PV = $14,000
FV = 0
Substituting the values in formula:
=pmt(0.50%,48,-14000,0)
PMT or Monthly Payment = $328.79
b) Computation of Principal Portion of the 25th Payment:
First we calculate Outstanding Balance after 24th Payment using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Outstanding Balance after 24th Paymnent = ?
Rate = 6%/12 = 0.50%
Nper = 48-24 = 24 months
PMT = $328.79
FV = 0
Substituting the values in formula:
=-pv(0.50%,24,328.79,0)
PV or Outstanding Balance after 24th Payment = $7,418.44
Interest on 25th Payment = $7,418.44*0.5% = $37.09
Principal Portion of the 25th Payment = $328.79 - $37.09 = $291.70