1. The James Company has been offered a 4-year loan from its bank in the amount of $100,000 at a stated interest rate of 10 percent per year. The loan will require four equal end-of-year payments of principal and interest plus a $30,000 balloon payment at the end of the fourth year.
a. Compute the amount of each of the end-of-year payments.
b. Prepare a loan amortization schedule detailing the amount of principal and interest in each year's payment.
c. What is the effective interest rate on this loan? Prove your answer.
2. A $1 million loan requires five end-of-year equal payments of $284,333.
a. Calculate the effective interest rate on this loan.
b. How much interest (in dollars) is paid over the life of this loan?