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(1 + )
=
(1 + ) 1
Let us first calculate the payment per month using the formula.
= 15% (0.15); = 10 12 = 120 ; = $8,500
=
(1.15)120
= $137.13
1.15120 1
Here is the schedule for the first 12 months showing principal, interest and balance from the excel
spreadsheet based on the monthly payment calculation from the formula.
Period
Payment
Principal Part
Interest Part
Balance
$137.13
$30.88
$106.25
$8,469.12
$137.13
$31.27
$105.86
$8,437.84
$137.13
$31.66
$105.47
$8,406.18
$137.13
$32.06
$105.08
$8,374.13
$137.13
$32.46
$104.68
$8,341.67
$137.13
$32.86
$104.27
$8,308.80
$137.13
$33.27
$103.86
$8,275.53
$137.13
$33.69
$103.44
$8,241.84
$137.13
$34.11
$103.02
$8,207.73
10
$137.13
$34.54
$102.60
$8,173.19
11
$137.13
$34.97
$102.16
$8,138.22
12
$137.13
$35.41
$101.73
$8,102.81
(. 15)
= $106.25
12
We see that the payment required matches this. Hence the calculation is not based on amortization but
interest only.
Part c:
Interest paid as requested by the company:
= ()()(12) = 106.25 120 = $12,750
Remember the money borrowed is not paid off. So technically you owe the company that $8,500 at the end
of 10 years. This is the disadvantage in interest only payments. The monthly payments are low but, you end
up paying more overall, if you choose to pay off the $8,500 at the end of the term. ($21,250)
The interest that you pay through amortization is shown above as $ 7,956.17
You would save by paying a little more every month as it is applied towards principal and so the interest paid
on a monthly basis will reduce, thus accruing more towards principal.
You would save about $21,250 $16456.17 = $4,973.83 over the period of the loan.