Chapter 7

Section 7.1
1. Level payments are fixed payment amounts for each period.
2. A drop payment is the last payment to pay off a loan, which is usually of slightly different
size than the previous payments to make sure that the loan balance is exactly zero.
3. The last payment will be slightly larger.
4. To find the amount of interest in you next payment, multiply your monthly interest rate by
the current loan balance; to find the amount of principal owed in the next payment,
subtract the amount of interest from the amount of your payment.
1−𝑣 𝑛 1
5. , 𝑤ℎ𝑒𝑟𝑒 𝑣=
𝑖 1+𝑖
6. 𝑃𝑎̅̅̅̅̅̅̅̅̅̅̅
𝑛−𝑘−1|𝑖 represents the present value of the remaining payments that need to be made,
excluding the drop payment. 𝐷𝑣 𝑛−𝑘 is the present value of the drop payment, to the time
after k payments have been made.
7. $632.65
8. $500.31
9. $8,171.25
10. $364,813.67; $164,813.67
11. a.$158,342.24 – this is the present value of the remaining future payments, excluding
the drop payment.
b. $617.91 – this is the present value of the drop payment, after k (180) payments have
been made.
12. a. $3,345.56 b. $12.55 in interest; $146.20 in principal
13. a. $1157.79 b. $145,601.88 c. $455.01 in interest; $702.78 in principal
14. a.i. $87,739.72 ii. $72,007.01 iii. $51,818.40 iv. $25,911.85
b. No, the balance is decreasing faster later in the life of the loan
c. Decreasing. As more principal is being taken off each payment, less interest is
accrued on the loan, so less interest needs to be paid each payment.
d. Increasing. Since less interest is being accrued onto the loan after each month, more
of the monthly payment can be used to lower the principal, and the amount of principal
taken off each month increases.
e. Since the amount of principal taken off the balance increases after each month, the
rate at which the balance is decreasing is faster later in the life of the loan than
compared to early in the life of the loan.
15. a. $1,013.38 b. i $160,177.45 ii. $949.68 iii. $15,280.88
16. $96,552.64
17. 2.625% APR
100(1−𝑣 (120−𝑥) ) 1
18. a. 100𝑎̅̅̅̅̅̅̅̅̅̅
120−𝑥|0.005 = 0.005
= 20,000 − 20,000 (1.005120−𝑥 ) = 20,000 −
1.005𝑥
20,000 ( ). b. Graph is concave down, c. Loan balance decreases faster later in
1.005120
the life of the loan. This suggests that the amount of interest in each payment decreases
over time. D. 0, E. $9,007.35

Section 7.2
 1. 𝑎̅̅̅
𝑛|𝑖 finds the present value of all n, future payments of $1 at an interest rate of i.
𝑠̅̅̅
𝑛|𝑖 finds the accumulated value of all payments of $1 after n periods at and interest rate
of i.
2. We gave the formula 𝐵(1 + 𝑖)𝑛 = 𝑃𝑠̅̅̅ 𝑛|𝑖 in this section, where B was the initial loan
balance and P was the amount of a level payment. What does each side represent, and
why are they equal?
The left side represents the accumulated value of the initial loan after n periods. The
right side represents the accumulated value of level payments made each period at an
interest rate of i.

3. You are finding the difference in the initial loan amount accumulated with no payments,
and the value in the sinking fund.
4. The effective interest rate (i) and the loan balance before the payment is made. Subtract
the interest from the periodic payment to find the amount of principal in the payment.
5. You multiply that balance by 1 + the periodic interest rate, because a whole period will
pass before you make the drop payment.
6. $61,043.82; this is more than half of the loan.
7. $9,684.75
8. $442.41
9. $191.84
10. $790.85
11. a. $238.12 b. $237.34 c. $18.82 in interest; $219.30 in principal
12. a. $1,175.60 b. $1,170.66 c. $668.81 in interest; $506.79 in principal
13. a. 20 years: $1,333.16; 30 years: $1,050.32 b. 20 years: $1,331.96; 30 years:
$1,045.92
c. 20 years: $101,290.36; 30 years: $158,110.80
14. 4.25%
15. a. i. 0.3675% ii. $1,253.35 iii. $201,206
b. i. 0.1836% ii. $626.10 iii. $200,792
c. Beth. Her payments are made more regularly, which leaves less time for interest to
accrue on the balance.
16. a. $1,211.97 b. $1,208.54 c. Total paid: $290,869.37; Interest paid: $90,869.37 d.
$119,704.19
e. i. 100 more months ii. $1,129.79 iii. $4,518.09
End of chapter
1. B
2. D
3. D
4. A
5. A
6. C
7. C
8. D
9. A
10. D
11. D
12. E
13. D
14. C
15. C
16. D
17. D