Question

Amortization Schedule

Consider a $10,000 loan to be repaid in equal installments at the end of each of the next 5 years. The interest rate is 8%.

- How large must each annual payment be if the loan is for $20,000? Assume that the interest rate remains at 8% and that the loan is still paid off over 5 years. Round your answer to the nearest cent.

$ _______ - How large must each payment be if the loan is for $20,000, the interest rate is 8%, and the loan is paid off in equal installments at the end of each of the next 10 years? This loan is for the same amount as the loan in part b, but the payments are spread out over twice as many periods. Round your answer to the nearest cent.

$ _______

Why are these payments not half as large as the payments on the loan in part b?

-Select one-**I.**Because the payments are spread out over a longer time period, more principal must be paid on the loan, which raises the amount of each payment.**II.**Because the payments are spread out over a longer time period, less interest is paid on the loan, which raises the amount of each payment.**III.**Because the payments are spread out over a longer time period, less interest is paid on the loan, which lowers the amount of each payment.**IV.**Because the payments are spread out over a shorter time period, more interest is paid on the loan, which lowers the amount of each payment.**V.**Because the payments are spread out over a longer time period, more interest must be paid on the loan, which raises the amount of each payment.

Step 1

1. Since the amount of loan has doubled with same factors as per the amortisation schedule given for the loan of $10,000, the installment amount will be doubled i.e. repayment will be $2504*2=**$5008.**

Step 2

2.

For computing the installment, we have taken the help of Present value of Annuity Table at 8% for 10 years

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