$25 a month is not enough to avoid negative amortization. Using the amortization table with
this monthly payment, we can see that after 20 years her debt will have grown to $4,059.34.
Paying $27.50 is enough to avoid negative amortization, but it is just a bit more than a dol-
lar above the $26.45 minimum. Nonetheless, this small difference is enough to reduce the
balance to $1,413.53 after 20 years.
At $30.00 a month, just a bit more, the question becomes irrelevant, because the debt
would be paid off in its entirety after the 206th payment.Negative amortization does not necessarily always occur, though, even if the payment is
not enough to cover the monthly interest on a loan’s balance. In some cases, laws or other
regulations, or even the terms of the loan itself, may prohibit compounding of interest on
the loan. In such cases, interest does continue to be charged on the outstanding balance,
but no interest is charged on any unpaid interest. The lender may still, though, assess late
payment fees or other fi nancial penalties, which may actually add up to more than com-
pounding interest would have.
In the exercises, you should assume that interest will be charged on the loan’s entire out-
standing balance, without any distinction between original principal and unpaid interest.
In other words, in the exercises you should assume that negative amortization may occur
exactly as it has in the examples above.A. Basic Amortization Tables- Les is borrowing $18,350 to buy a new car. The loan interest rate is 6%, the term is 5 years, and his monthly payment is
$354.76. Assume he makes all of his payments as scheduled.
a. Construct an amortization table for Les’ car loan.
b. How much should his last payment be in order for the fi nal balance to be exactly $0.00.
c. How much total interest will Les pay on this loan.- Jasmine has just graduated from pharmacy college, and owes $38,965 in student loans that she must now start
making payments on. Her monthly payments will be based on a 20-year term at a 5.39% interest rate. Assume she
makes all of her payments as scheduled.
a. Calculate her monthly payment.
b. Construct an amortization table for her loan using this payment.
c. According to this schedule, how much of her fi rst payment will go to interest? To principal?
d. According to this schedule, how must of her 121st payment (when she is halfway through the term) will go to
interest? To principal?
e. How much should her last payment be to bring her fi nal balance to exactly $0.00.- Anica has taken out a business start-up loan for $75,000. The interest rate is 9.3% and she will make monthly
payments for 10 years. Assume she makes all payments as scheduled.
a. Calculate the monthly payment for this loan.
b. How much total interest will she pay in the fi rst year of this loan?
c. How much should her last payment be to bring her fi nal balance to exactly $0.00.
d. How much will Anica owe halfway through this loan’s term?EXERCISES 5.3
Copyright © 2008, The McGraw-Hill Companies, Inc.
Exercises 5.3 233