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**Jan sold her house on December 31 and took a $5,000 mortgage as part of the payment. The 10-year mortgage has a 10% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year.**

**a. What is the dollar amount of each payment Jan receives?**

**b. How much interest was included in the first payment? How much repayment of principal was included?**

**c. How do these values change for the second payment? (choose one of the following)**

- The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal increases.
- The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal decreases.
- The portion of the payment that is applied to interest and the portion of the payment that is applied to principal remains the same throughout the life of the loan.
- The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal also declines.
- The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal also increases.

**d. How much interest must Jan report on Schedule B for the first year?**

**e. Will her interest income be the same next year? (choose one of the following)**

- Her interest income will increase in each successive year.
- Her interest income will remain the same in each successive year
- She will not receive interest income, only return of capital.
- Her interest income will decline in each successive year.
- She will receive interest only when the mortgage is paid off in 10 years.

**f. If the payments are constant, why does the amount of interest income change over time? (choose one of the following)**

- As the loan is amortized (paid off), the beginning balance, hence the interest charge, increases and the repayment of principal increases.
- As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal increases.
- As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal declines.
- As the loan is amortized (paid off), the beginning balance, hence the interest charge, increases and the repayment of principal declines.
- As the loan is amortized (paid off), the beginning balance declines, but the interest charge and the repayment of principal remain the same.

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