Using the Composition of Loan Payments Chart an Interactive Chart

question 35

Essay

Using the Composition of Loan Payments Chart An interactive chart for investigating the composition of loan payments is provided in the textbook's Online Learning Centre (OLC). Go to the Student Edition of the OLC. In the navigation bar, select "Chapter 14" in the drop-down box. In the list of resources for Chapter 13, select "Links in Textbook" and then click on the link named "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 semi-annually. Monthly payments of $800 will pay off the loan in 25 years and 4 months.
a) How much more interest is paid by the 20^th payment than the 220^th 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 5^th payment?
f) Which payment number comes closest to having half the interest component of the 10^th payment?

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