An interactive chart for investigating the composition of loan payments is provided in the textbook’s Web site. In Chapter 14 of the Student Edition, find “Composition of Loan Payments.”
The chart provides cells for entering the essential information about a loan (PV, j, m, PMT, and payments/year). You can then compare the composition (interest and principal components) of any two payments. Simply enter the serial numbers of the two payments and then click on the “Submit” button. Two bar diagrams provide a visual comparison of the interest and principal components. The actual numerical values are also displayed.
Consider a $120,000 mortgage loan at 6.5% compounded semiannually. Monthly payments of $800 will pay off the loan in 25 years and 4 months.
a. How much more interest is paid by the 20th payment than the 220th payment?
b. How long does it take before the interest component of a payment drops below 50%?
c. Which payment number is closest to being comprised of:
(i) 75% interest?
(ii) 25% interest?
d. Which payment number comes closest to having a mix of principal and interest that is the opposite of the first payment’s mix?
e. Which payment number comes closest to having double the principal component of the 5th payment?
f. Which payment number comes closest to having half the interest component of the 10th payment?