Question

a. Two years ago your firm took out a 30- year amortizing loan to purchase a small office building. The loan has a 4.80% APR with monthly payments of $2623.33.

i. How much do you owe on the loan today? (4 points)
ii. How much interest did the firm pay on the loan in the past year? (5 points)
iii. Suppose starting next year (fourth year) the loan rate jumps to 7.2% APR. What is the remaining balance? What will be the monthly payment? (6 points)

Answer 1

Answer:

i. How much do you owe on the loan today?

• remaining principal balance = $484,331.31

ii. How much interest did the firm pay on the loan in the past year?

• during year 2, $23,458 was paid in interests ($28,833.33 was paid in interest during year 1).

iii. Suppose starting next year (fourth year) the loan rate jumps to 7.2% APR. What is the remaining balance? What will be the monthly payment?

• the remaining balance at the beginning of year 4 is $475,916
• the new monthly payment will be $3,375.72

Explanation:

I prepared two amortization schedules using an excel spreadsheet. The principal on the loan was $500,000. The first one has a fixed 4.8% APR for the whole 30 years. In the second one, the APR changes to 7.2% at the beginning of year 4.