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LOAN AMORTIZATION Jan sold her house on December 31 and took a \$10,000 mortgage as part of the payment. The 10-year mortgage has a 10% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year.a. What is the dollar amount of each payment Jan receives?b. How much interest was included in the first payment? How much repayment of principal was included? How do these values change for the second payment?c. How much interest must Jan report on Schedule B for the first year? Will her interest income be the same next year?
a. The dollar amount of each payment Jan receives = (10%*\$10,000)+(10%*\$10,000) =\$2000 b. Amount Borrowed 10,000 Number of periods 20 Rate 0.05 Payment 802.43 For payment use the excel formula PMT(rate,number of periods,-amount borrowed, 0) as the future value is 0 For constucting this table start with a beginning balance of \$10,000, payment we have already calculated as \$802.43, interest=beginning balance * rate, Principal is Payment-interest, ending balance is beginning balance – principal. The ending balance for the first duration becomes the beginning balance for the second duration. Months Beginning Payment Interest Principal Ending Balance Jun-00 10,000 802.43 500 302.43 9,697.57 Dec-00 9,697.57 802.43 484.88 317.55 9,380.03 Jun-01 9,380.03 802.43 469.00 333.42 9,046.60 Dec-01 9,046.60 802.43 452.33 350.10 8,696.51 Jun-02 8,696.51 802.43 434.83 367.60 8,328.91 Dec-02 8,328.91 802.43 416.45 385.98 7,942.93 Jun-03 7,942.93 802.43 397.15 405.28 7,537.65 Dec-03 7,537.65 802.43 376.88 425.54 7,112.10 Jun-04 7,112.10 802.43 355.61 446.82 6,665.28 Dec-04 6,665.28 802.43 333.26 469.16 6,196.12 Jun-05 6,196.12 802.43 309.81 492.62 5,703.50 Dec-05 5,703.50…

43 285.18 517.25 5,186.25 Jun-06 5,186.25 802.43 259.31 543.11 4,643.14 Dec-06 4,643.14 802.43 232.16 570.27 4,072.87 Jun-07 4,072.87 802.43 203.64 598.78 3,474.08 Dec-07 3,474.08 802.43 173.70 628.72 2,845.36 Jun-08 2,845.36 802.43 142.27 660.16 2,185.20 Dec-08 2,185.20 802.43 109.26 693.17 1,492.04 Jun-09 1,492.04 802.43 74.60 727.82 764.22 Dec-09 764.22 802.43 38.21 764.22 0.00 Interest included was \$500. Payment was \$802.43 and principal was \$302.43. For the second paymentthe beginning balance is \$9697.57, payment is \$802.43, interest is \$484.88, principal is \$317.55, ending balance is \$9380. c. For the first year Jan should report interest of 500+484.88=\$984.88 The next year the interest income would be \$469+\$452.33=\$921.33 The interest income changes in the next year

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