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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

LOAN AMORTIZATION Jan sold her house on December 31 and took a $10,000 mortgage as part of the payment. The 10-year mortgage has a 10% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year.

  1. a. What is the dollar amount of each payment Jan receives?
  2. b. How much interest was included in the first payment? How much repayment of principal was included? How do these values change for the second payment?
  3. c. How much interest must Jan report on Schedule B for the first year? Will her interest income be the same next year?
  4. d. If the payments are constant why does the amount of interest income change over time?

a.

Summary Introduction

To compute: Dollar amount of each payment J receives.

Amortization:

Amortization is to write off or pay the debt over the period of time it can be for a loan or intangible assets. Its purpose is to get cost recovery. Example of amortization is, an automobile firm have made a spending of $20 million dollars on a design patent with a useful life of twenty years. The company’s amortization value will be $1 million for every year.

Explanation

Formula to calculate the amount of each payment or PMT

PV=PMT×((1+I)N1I×(1+I)N)

Substitute PV for $10,000, I for 5% and N for 20years.

$10,000=PMT×((1+0.05)2010.05×(1+0.05)20)$10,000=PMT×(2

b.

Summary Introduction

To compute: Interest that is included in the first payment, repayment of principal,changes in value for second payment.

Amortization:

Amortization is to write off or pay the debt over the period of time it can be for a loan or intangible assets. Its purpose is to get cost recovery. Example of amortization is, an automobile firm have made a spending of $20 million dollars on a design patent with a useful life of twenty years. The company’s amortization value will be $1 million for every year.

c.

Summary Introduction

To Explain: interest on Schedule B for the next year and income in the next year.

Amortization:

Amortization is to write off or pay the debt over the period of time it can be for a loan or intangible assets. Its purpose is to get cost recovery. Example of amortization is, an automobile firm have made a spending of $20 million dollars on a design patent with a useful life of twenty years. The company’s amortization value will be $1 million for every year.

(d)

Summary Introduction

To explain: Change in amount of interest income on the constant amount over atime period.

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