HOW MUCH INTEREST IS TO BE PAID IN THE SECOND YEAR OF A 6-YEAR LOAN...

9. How much interest is to be paid in the second year of a 6-year loan of $100,000 with

payments occurring at the end of each month, and a 6% annual interest rate

compounded monthly?

A) $1,389

B) $1,657

C) $4,731

D) $6,000

E) $9,887

Answer C

The payment on this loan is given by:

PMT = $100,000 / PVIFA(0.5%,72) = $1,657.29

The residual balances at the end of year 1 and year 2 are given by:

PV

= $1,657.29 x PVIFA(0.5%,60) = $85,724.25

PV

= $1,657.29 x PVIFA(0.5%,48) = $70,567.93

So the principal paid in year 2 is: $85,724.25 - $70,567.93 = $15,156.32

And the interest paid in year 2: 12 x $1,657.29 - $15,156.32 = $4,731.16