In interest-only loans, the borrower pays only interest through monthly payments. She repays the principal in a lump sum at maturity. For example, you borrowed $30,000 from your local bank on the day you entered college. The terms of the loan include an interest rate of 4.75 percent. The terms stipulate that the principal is due in full one year after you graduate. Interest is to be paid annually at the end of each year. Assume that you complete college in four years.

How much total interest will you pay on this loan assuming you paid as agreed?

a.$1,425

b.$7,400

c.$7,267

d.$7,125

e. $1,500

Question

Derrick Conley

Business

4 July, 15:13

In interest-only loans, the borrower pays only interest through monthly payments. She repays the principal in a lump sum at maturity. For example, you borrowed $30,000 from your local bank on the day you entered college. The terms of the loan include an interest rate of 4.75 percent. The terms stipulate that the principal is due in full one year after you graduate. Interest is to be paid annually at the end of each year. Assume that you complete college in four years.

How much total interest will you pay on this loan assuming you paid as agreed?

a.$1,425

b.$7,400

c.$7,267

d.$7,125

e. $1,500

+1

Answers (1)

Know the Answer?

Brenton Mitchell · Answer 1

d. $ 7,125

Explanation:

Computation of interest payment due

Interest is to be calculated for 5 years, 4 years of college and 1 year after graduation per the terms of the loan.

Interest rate per year at 4.75 % $ 30,000 * 4.75 % = $ 1,425

Interest for 5 years = Annual interest $ 1,425 * 5 years = $ 7,125