Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal

Percentage of 2nd installment = 90%  

Explanation:

Loan Amortization: A loan repayment method structured such that a series of equal periodic installments will be paid for certain number of periods to offset both the loan principal amount and the accrued interest.  

The monthly installment is computed as follows:  

Monthly installment= Loan amount/annuity factor  

Loan amount =72,500

Annuity factor = (1 - (1+r)^(-n))/r  

r -monthly rate of interest, n- number of months  

r- 11%/12 = 0.916% = 0.0091667 , n = 1× 12 = 12  

Annuity factor = ( 1- (1+0.0091667)^(-12))/0.0091667= 11.3149

Monthly installment = Loan amount /annuity factor  

= $72,500 /11.3149= 6407.47  

Monthly installment = $6407.47

Principal due in year :                                 72,500

Interest due in year 1 = 0.916%×72,500    664.59

Principal balance  paid in year 1 =  6407.47- 664.59 = 5742.88

Interest due in year 2 =       0.916%×  (72,500- 5742.88)   = 641.53

Principal paid in year 2 = 6407.47-  641.53 =5765.93

Percentage of principal that goes into repayment of

principal = (principal paid in year 2 /monthly installment)× 100

                (5765.93/6407.47) × 100 = 90%

Percentage of 2nd installment = 90%        

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the answer is a.

by: nicholas dooley