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This question is to demonstrate a key application of ordinary annuities in real lifea fully amortized loan Assuming that you borrowed $5,000 at an annual
- This question is to demonstrate a key application of ordinary annuities in real lifea fully amortized loan
Assuming that you borrowed $5,000 at an annual interest rate of 6%, compounded annually. If you have to repay it over five years with equal amounts each year.
- What will be the annual repayment?
- If the annual repayment is $1186.98, fill up the empty cells in the table below.
Compounding period (year) | Beginning Balance | Total payment | Interest paid | Principal paid | Ending balance |
1 | $5000 |
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2 |
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3 |
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4 |
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5 |
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Totals |
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- Each yearly repayment is divided into two portions. One portion represents the principal paid while the other portion indicates the interest payment. Does the interest payment each year increase or decrease over time? Why does this happen?
- How much do you owe the bank at the beginning of year 1, year 2, year 3, year 4 and year 5?
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