Exploration 2.

1
1. $2,762.82; $12,762.82
2.

Year Principal balance (Jan Interest accrued Payment (Dec New loan
1) (Jan 1-Dec 31) 31) balance (Dec
31)
1 $10,000 $500 $0 $10,500
2 $10,500 $525 $0 $11,025
3 $11,025 $551.25 $0 $11,576.25
4 $11,576.25 $578.81 $0 $12,155.06
5 $12,155.06 $607.75 $0 $12,762.82
6 $12,762.82 XXX XXX XXX
3. Pro: No regular is payment is required until the end of the loan
Con: If the borrower does not save money over the course of the loan, they will likely not
have enough money to pay back the loan.
4. Answers may vary.
Pro: Maximum interest is accrued from the loan, which the lender will receive at the end
of the loan period.
Con: If the borrower cannot afford to pay back the loan, the asset to which the borrow
bought with the loan may be worth less than the loan due to depreciation. IF the lender
chooses to repossess the asset, that asset is not worth the value of the loan.
5. $10,000
6. 5 years
7. 1 time, at the end of the 5 years
8. i = 0.05; the frequency of compounding is annually
9. There would be required annual payments, instead of one lump payment at the end of
the 5-year term. The interest payments would be $500 each year, for a total of $2500
paid in interest.
10. The original loan would be costing more. This is because interest builds up on top of
interest accrued from the previous years. The interest-only loan ensures that the
principal balance stays at $10,000 each year.
11.
Year Principal balance (Jan Interest accrued Payment (Dec New loan
1) (Jan 1-Dec 31) 31) balance (Dec
31)
1 $10,000 $500 $500 $10,000
2 $10,000 $500 $500 $10,000
3 $10,000 $500 $500 $10,000
4 $10,000 $500 $500 $10,000
5 $10,000 $500 $500 $10,000
6 $10,000 XXX XXX XXX
12. $10,000. You have not paid off any amount of the original loan, only the interest,
meaning you still ow $10,000 to your parents. This is a problem because you are still in
debt (despite making yearly payments of $500) and you have not paid off any cent of the
original loan.
 13. You need to make monthly payments that are greater than $500, and preferably
payments that will pay off the loan in 5 years. By doing this, you will be paying off both
the annual interest and some of the principal amount.
14.

Year Principal Interest accrued Payment (Dec New loan

balance (Jan 1) (Jan 1-Dec 31) 31) balance (Dec
31)
1 $10,000 $500 $600 $9,900
15. Less total interest. Less interest accrues on the new loan balance each year because
the annual payment is large enough to pay off the annual interest and some of the
principal balance.
16.

Year Principal Interest accrued Payment (Dec New loan

balance (Jan 1) (Jan 1-Dec 31) 31) balance (Dec
31)
1 $10,000 $500 $600 $9,900
2 $9,900 $495 $600 $9,795
3 $9,795 $489.75 $600 $9,684.75
4 $9,684.75 $484.24 $600 $9,568.99
5 $9,568.99 $478.45 $600 $9,447.44
6 $9,447.44 XXX XXX XXX
17.

Year Principal Interest accrued Payment (Dec New loan

balance (Jan 1) (Jan 1-Dec 31) 31) balance (Dec
31)
1 $10,000 $500 $1,000 $9,500
2 $9,500 $475 $1,000 $8,975
3 $8,975 $448.19 $1,000 $8,423.75
4 $8,423.75 $421.19 $1,000 $7,844.94
5 $7,844.94 $392.25 $1,000 $7,237.18
6 $7,237.18 XXX XXX XXX
18. In order to pay off the loan in 5 years, the annual payment must be $2,309.75

Year Principal Interest accrued Payment (Dec New loan

balance (Jan 1) (Jan 1-Dec 31) 31) balance (Dec
31)
1 $10,000 $500 $2,309.75 $8,190.25
2 $8,190.25 $409.51 $2,309.75 $6,290.01
3 $6,290.01 $314.50 $2,309.75 $4,294.76
4 $4,294.76 $214.74 $2,309.75 $2,199.75
5 $2,199.75 $109.99 $2,309.75 $01
6 $0 XXX XXX XXX
1
The final balance is technically $-0.01. The last payment would likely be $0.01 less. This is due
to rounding.
19. $1,548.74
20. $10,000
 21. $11,548.74
22. $2,309.75 * 5 (sum of payments) = $10,000 (principal) + $1,548.74 (total interest paid)
23. $1,548.74 < $2,500 < $2,762.82; The ‘no payments until the end’ loan has the most total
interest because interest is building up on top of interest. The interest-only loan is slightly
less because no interest is building up onto interest. The amortized loan has the least
total interest because the principal is decreasing each year, causing for less interest
being accrued each year.
24. The amortized loan, because the car will then only be costing you $11,548.74, as
compared to $12,500 and $12,762.82.

Exploration 2.2
1. The amount of interest in each payment decreases because the loan balance at the
beginning of each period is decreasing.
2. The amount of principal in each payment increases because less interest is being
accrued each period, causing for a greater proportion of the payment to be applied to the
principal.
3.

Year Principal Interest accrued Payment New loan Proportion

balance (Jan 1-Dec 31) (Dec 31) balance of
(Jan 1) (Dec 31) payment
going to
interest
1 $10,000 $500 $2,309.75 $8,190.25 0.216
2 $8,190.25 $409.51 $2,309.75 $6,290.01 0.177
3 $6,290.01 $314.50 $2,309.75 $4,294.76 0.136
4 $4,294.76 $214.74 $2,309.75 $2,199.75 0.093
5 $2,199.75 $109.99 $2,309.75 $0 0.048
6 $0 XXX XXX XXX
4. The proportion paid towards interest is decreasing over time. It is not declining at a
constant amount.
5. Near the beginning.
6. Near the end of the loan.
7. Answer may vary. Because the loan term would be extended, it would be in the
borrower’s best interest to not accept the offer so that less total interest is paid on the
loan.
8.

Year Principal Interest accrued (Jan Payment (Dec New loan

balance (Jan 1-Dec 31) 31) balance (Dec
1) 31)
1 $10,000 $500 $2,309.75 $8,190.25
2 $8,190.25 $409.51 $2,309.75 $6,290.01
 3 $6,290.01 $314.50 $2,309.75 $4,294.76
4 $4,294.76 $214.74 $991.98 $3,517.52
5 $3,517.52 $175.88 $991.98 $2,701.42
6 $2,701.42 $135.07 $991.98 $1,844.51
7 $1,844.51 $92.23 $991.98 $944.75
8 $944.75 $47.24 $991.98 $0

9. $10,000
10. $1,548.74 in interest in the original loan vs. $1,889.16 in interest in the refinancing offer.
11. The time-frame increased by 3 years (8 years total).
12. An increased time frame results in more time for interest to build up on the principal.
13.

Year Payment (Dec Amount of Amount of Proportion of

31) payment going payment going payment going
to interest to principal to interest
1 $2,309.75 $500 $1,809.75 0.216
2 $2,309.75 $409.51 $1,900.24 0.177
3 $2,309.75 $314.50 $1,995.25 0.136
4 $991.98 $214.74 $777.24 0.216
5 $991.98 $175.88 $816.10 0.177
6 $991.98 $135.07 $856.91 0.136
7 $991.98 $92.23 $899.75 0.093
8 $991.98 $47.24 $944.74 0.048
14. Immediately following the refinance, the amount of payment going towards principal
decreases. The amount going towards interest decreases, but not as much as in the
original loan. The proportion of payment that goes towards interest increases
immediately following the refinance, but then decreases after that.
Exploration 2.3
1. $500
2. a. $90,000 b. 0 c. $100,000
3. The value of the house is expected to either stay the same or increase in value. The
borrower is expected to easily make the monthly payments
4. $343.86
5. $843.86 = $343.86 + $500.00
6. Because both the sinking fund and amortization approach have the same effective
interest rate.
7. It would increase.
8. It would increase.
9. An amortized loan at 6% APR, because a sinking fund earning 3% interest would require
larger monthly payments in order to accumulate the loan balance at the end of the term.
10. They would decrease.
11. An interest-only loan at 6% with sinking fund at 12%, because less money would need to
be deposited monthly to accumulate the loan balance at the end of the term.
12. Less than $500, because interest will accumulate on the first payment for a year.
13. P(1 + 0.05)
14. P
15. $487.80
16. a. 450, b. 0.005, c. $290.82. This is how much you would have in an account earning 6%
APR which received a payment of $1 at the end of every month for 15 years. d. $343.86