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3. (20 pts) An amortized loan requires a borrower to repay parts of the loan amount over time. Almost all consumer loans are amortized loans.
3. (20 pts) An amortized loan requires a borrower to repay parts of the loan amount over time. Almost all consumer loans are amortized loans. Amortizing a loan is the process of providing for a loan to be paid off by making regular principal deductions. There are generally two ways for amortizing a loan. One way is to repay in equal instalments. But the composition of principal and interest is varying in each period. The other way involves repaying an equal amount of principal plus a varying amount of interest in each period. This approach is common with medium-term business loans. For example, a four-year loan of $50,000 with annual interest rate of 8% has the following schedule based on the first way of equal instalments: 1 + Year Beginning Annual = Principal Interest Ending Balance Installment Balance 1 $50,000 A1 4,000 E1 =50,000*8% =50000-A1 2 B2=E1 C A2 12 E2 3 B3 C A3 13 E3 4 B4 C A4 14 E4 Total NA T1 $ 50,000 T2 NA a. Complete the above schedule by replacing all the letters with numbers. b. Complete the schedule of the second method of equal principals below. Year Beginning Annual = Principal Interest Ending Balance Payment Balance 1 $50,000 16,500 12,500 4,000 37,500 =50,000*8% 2 37,500 C2 12,500 12' E2' C3 12,50 E3' 4 B4 C4 12,500 14' E4' Total NA T1 $ 50,000 T2 NA Are the two schedules equivalent in terms of present values? Why or why not? d. Why is the PV of interest payments higher for the equal-installment schedule? + c
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