56. Balloon Payments. On September 1, 2018, Susan Chao bought a motorcycle for $17,000. She paid $1,500 down and financed the balance with a five-year loan at an annual percentage rate of 6.8 percent compounded monthly. She started the monthly payments exactly one month after the purchase (i. e., October 1, 2018). Two years later, at the end of October 2020, Susan got a new job and decided to pay off the loan. If the bank charges her a 1 percent prepayment penalty based on the loan balance, how much must she pay the bank on November 1, 2020

Balloon Payments by Susan Chao

The amount that Susan must pay the bank on November 1, 2020 is:

= $8,989.

Explanation:

a) Data and Calculations:

Cost of motorcycle = $17,000

Down payment = $1,500

Balance financed through a five-year loan = $15,500

Annual Percentage Rate = 6.8% compounded monthly

Payment duration = October 1, 2018 to October 31, 2020

Number of payments made = 24

Total amount of payments made = $7,731.00 ($305.46 * 24)

Interest paid for 24 months = $1,131 ($2,827.49* 24/60)

Principal repaid = $6,600

Loan balance = $8,900 ($15,500 - $6,600)

1% Prepayment Penalty on $8,900 = $89

Total amount that Susan must pay the bank on November 1, 2020 = $8,989 ($8,900 + $89).

From an online finance calculator:

PMT = $305.46

Sum of payments for two years = $7,331.04

Sum of all periodic payments = $18,327.49

Total Interest$2,827.49

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explanation:

1. c

2. b

3. a

4. c

5. a

6. b

7. c

8. c

9.b

10. d

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