Question

A $10,000 loan can be repaid quarterly for 5 years using amortization
and an interest rate of j12 = 10% or by a sinking fund to repay both principal and
accumulated interest. If paid by a sinking fund, the interest on the loan will be
j12 = 9%: What annual efective rate must the sinking fund earn to make the
quarterly cost the same for both methods?

Answer 1

ANSWER:

• The inquiry is quiet on the sinking store choice whether the enthusiasm of 9% is basic or compound (whenever intensified, yearly or something else). So how about we accept straightforward interested.

• In the sinking sinking fund option, the last installment ought to be (Prinicipal + Interest) = (10,000 + (5*9%*10000)) = $14,500

• So Now, we have to discover the sinking fund rate, that will keep the quarterly installment same in the two alternatives, yet yields $14,500 following 5 years.

• In the amortization alternative, utilizing the Present Value of $10,000, Interest Rate = 3% per quarter, Periods = 20, and the PMT work, we get a quarterly installment of $672.16

• Along these lines, utilizing the rate work, and the information sources, FV = $14,500, Payment = $672.16, Periods=20, we get Rate = 0.789% per Quarter

• Yearly Effective Interest Rate = 3.1935%