An important application of compound interest involves amortized loans. Some common types of amortized loans are automobile loans, home mortgage loans, and business loans. Each loan payment consists of interest and repayment of principal. This breakdown is often developed in an amortization schedule. Interest is largest in the first period and declines over the life of the loan, while the principal repayment is smallest in the first period and it increases thereafter. Quantitative Problem. You need $20,000 to purchase a used car. Your wealthy unde is willing to lend you the money as an amortized loan. He would like you to make annual payments for 5 years, with the first payment to be made one year from today. He requires a 5% annual return a. What will be your annual loan payments? Do not round intermediate calculations. Round your answer to the nearest cent.
b. How much of your first payment will be applied to interest and to principal repayment? Do not round intermediate calculations, Round your answers to the nearest cent. Interest: $ 1000 Principal repayment: