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25 July, 07:07

You are about to borrow $15,000 "from a bank at an interest rate of" 8% compounded annually. You are required to make three equal annual repayments in the amount of $5,820.50 per year, with the first repayment occurring at the end of year 1. Show the interest payment and principal payment in each year.

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  1. 25 July, 07:27
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    Year 1 $15000

    Interest $1,200

    repayment $5,820.50

    Year 2 $10,379.50

    Interest $830.36

    repayment $5,820.50

    Year 3 $5,389.36

    Interest $431.15

    repayment $5,820.50

    Closing balance $0

    Explanation:

    Year 1 Interest = $15,000 * 8% = $1,200

    Closing balance at the end of year 1 = $15,000 (loan principal) + $1,200 (interest) - $5,820.50 = $10,379.50

    Year 2 Interest = $10,379.50 * 8% = $830.36

    Closing balance at the end of year 2 = $10,379.50 (opening balance prior year) + $830.36 (interest) - $5,820.50 = $5,389.36

    Year 3 Interest = $5,389.36 * 8% = $431.15

    Closing balance at the end of year 3 = $5,389.36 (opening balance prior year) + $431.15 (interest) - $5,820.50 = 0
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