Suppose we are borrowing $1,000 at 12% annual interestwith 60 monthly payments. Assume equal payments aremade at the end of month 1, month 2, . . . month 60. Weknow that entering into Excel the functionPMT(.01, 60, 1,000)would yield the monthly payment ($22.24).It is instructive to use LP to determine the montly payment. Let p be the (unknown) monthly payment. Each monthwe owe .01 (our current unpaid balance) in interest. Theremainder of our monthly payment is used to reduce the unpaid balance. For example, suppose we paid $30 each month.At the beginning of month 1, our unpaid balance is $1,000.Of our month 1 payment, $10 goes to interest and $20 topaying off the unpaid balance. Then we would begin month2 with an unpaid balance of $980. The trick is to use LP todetermine the monthly payment that will pay off the loan atthe end of month 60.
Suppose we are borrowing $1,000 at 12% annual interest
with 60 monthly payments. Assume equal payments are
made at the end of month 1, month 2, . . . month 60. We
know that entering into Excel the function
PMT(.01, 60, 1,000)
would yield the monthly payment ($22.24).
It is instructive to use LP to determine the montly payment. Let p be the (unknown) monthly payment. Each month
we owe .01 (our current unpaid balance) in interest. The
remainder of our monthly payment is used to reduce the unpaid balance. For example, suppose we paid $30 each month.
At the beginning of month 1, our unpaid balance is $1,000.
Of our month 1 payment, $10 goes to interest and $20 to
paying off the unpaid balance. Then we would begin month
2 with an unpaid balance of $980. The trick is to use LP to
determine the monthly payment that will pay off the loan at
the end of month 60.
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