I need help with the following question:
Imagine you take a loan of $100 with 10 year maturity. The interest rate is 5% and the payment schedule is quarterly. I have to calculate the principal payments for the first quarter. The right answer is 1.94, however I got 3.19 by using following equation:
100 = x * [(1- (1 + 0.05/4)^-(10*4)) / (0.05 / 4)].
Could someone tell me, what is the problem with my calculations? Thank you very much.
The formula you have above will solve for the quarterly payment, which is indeed $3.19. That $3.19 is the total of the interest and principal portions. For the first quarter, you could just calculate the interest and deduct it from the payment.
Interest cost for the first quarter = 100 *0.05/4 = 1.25
Principal portion = total payment - interest portion = 3.19 - 1.25 = 1.94
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