QUESTION

Clare Jarrett has just closed a business loan of $400 000 to assist with the purchase of equipment and fixtures for her small business. The loan will be repaid in five (5) equal annual end-of-year installments and the institution has agreed to lend at a rate of 8% compounded annually. As part of her business' detailed financial planning, she wishes to determine the annual interest payments attributable to the loan.

A. Determine the business yearly payment on a $400 000 loan.

B. Prepare an amortization schedule for this loan.

C. What is the loan balance at the end of year 3?

D. How much interest expense will Ms. Jarrett pay over the life of the loan?

E. What is the effective rate of interest on the loan if interest is compounded quarterly?