A ten year loan of 10,000 at 8% annual effective can be repaid using any of the 4 following methods:
(I) Amortization method, with annual payments at the end of each year.
(II) Repay the principal at the end of ten years while paying the 8% annual effective interest on the loan at the end of each year. In addition, make equal annual deposits at the end of each year into a sinking fund earning 6% annual effective so that the sinking fund accumulates to 10,000 at the end of the 10th year.
(III) Same as (II), except the sinking fund earns 8% annual effective.
(IV) Same as (II), except the sinking fund earns 12% annual effective.
Rank the annual payment amounts of each method.
A ten year loan of 10,000 at 8% annual effective can be repaid using any of the 4 following methods:
(I) Amortization method, with annual payments at the end of each year.
(II) Repay the principal at the end of ten years while paying the 8% annual effective interest on the loan at the end of each year. In addition, make equal annual deposits at the end of each year into a sinking fund earning 6% annual effective so that the sinking fund accumulates to 10,000 at the end of the 10th year.
(III) Same as (II), except the sinking fund earns 8% annual effective.
(IV) Same as (II), except the sinking fund earns 12% annual effective.
Rank the annual payment amounts of each method.
Related questions
Amortization Schedule
Consider a $50,000 loan to be repaid in equal installments at the end of each of the next 5 years. The interest rate is 6%.
Set up an amortization schedule for the loan. Round your answers to the nearest cent. Enter "0" if required
| Year | Payment | Repayment Interest | Repayment of Principal | Balance |
| 1 | $ | $ | $ | $ |
| 2 | $ | $ | $ | $ |
| 3 | $ | $ | $ | $ |
| 4 | $ | $ | $ | $ |
| 5 | $ | $ | $ | $ |
| Total | $ | $ | $ | |
How large must each annual payment be if the loan is for $100,000? Assume that the interest rate remains at 6% and that the loan is still paid off over 5 years. Round your answer to the nearest cent.
$
How large must each payment be if the loan is for $100,000, the interest rate is 6%, and the loan is paid off in equal installments at the end of each of the next 10 years? This loan is for the same amount as the loan in part b, but the payments are spread out over twice as many periods. Round your answer to the nearest cent.
$
Why are these payments not half as large as the payments on the loan in part b?
I. Because the payments are spread out over a shorter time period, more interest is paid on the loan, which lowers the amount of each payment.
II. Because the payments are spread out over a longer time period, more interest must be paid on the loan, which raises the amount of each payment.
III. Because the payments are spread out over a longer time period, more principal must be paid on the loan, which raises the amount of each payment.
IV. Because the payments are spread out over a longer time period, less interest is paid on the loan, which raises the amount of each payment.
V. Because the payments are spread out over a longer time period, less interest is paid on the loan, which lowers the amount of each payment.
