Time Value of Money: Amortized Loans

An extremely important application of

interest involves amortized

loans. Some common types of amortized loans are automobile loans, home mortgage

loans, student loans, and many business loans. Each loan payment consists of interest

and repayment of principal. This breakdown is often developed in an amortization

schedule. Interest is

in the first period and

over the life

of the loan, while the principal part repayment is

in the first period and

it

$|$ thereafter.

Quantitative Problem: You need $$14,000$ to purchase a used car. Your wealthy uncle

is willing to lend you the money as an amortized loan. He would like you to make

annual payments for $5$ years, with the first payment to be made one year from today.

He requires a $6\%$ annual return. Do not round intermediate calculations. Round your

answers to the nearest cent.

a$.$ What will be your annual loan payments?

$

b$.$ How much of your first payment will be applied to interest and to principal

repayment?

Interest: $

Principal repayment: $

$1.$compoud, real, or simple

$2.$ smallest or largest

$3.$ declines or increases

$4.$ smallest or largest

$5.$ declines or increases