Assume you have taken out a partially amortizing loan for $1,000,000 that has a term of 7 years, but amortizes over 20 years. Calculate the balloon payment if the interest rate on this loan is 9%.
A) $8,997
B) $559,199
C) $825,679
D) $936,405

Question

Quizplus · Accepted Answer

To calculate the balloon payment, we first need to determine the monthly payment on the loan using the amortization schedule. We can use the PMT function in Excel or a financial calculator to do this calculation.

PMT = Pv * r * (1 + r)^n / [(1 + r)^n - 1]

Where:
Pv = Present value or the principal amount of the loan = $1,000,000
r = Monthly interest rate = 9%/12 = 0.0075
n = Total number of payments or the term in months = 7*12 = 84

Using this formula, we get the monthly payment = $8,198.09

The balloon payment is the remaining principal balance at the end of the loan term, which can be calculated as follows:

Balloon payment = Present value * (1 + Monthly interest rate)^Total number of payments - Total of monthly payments

Balloon payment = $1,000,000 * (1 + 0.0075)^84 - ($8,198.09 * 84)

Balloon payment = $825,679.12

Therefore, the best choice is (C) $825,679.

Assume You Have Taken Out a Partially Amortizing Loan for $1,000,000