Question

Mahmoud has borrowed SR 7,000 from a local bank, such that he will pay them back in 5 equal installments starting from the end of year 1 (i.e. first payment will be due at n=1). After making the second installment (i.e. at n=2), Mahmoud decided to settle his loan (i.e. pay the remaining amounts to the bank), how much should the bank charge him at 9% interest?

		a) 6345
		b) 5760
		c) 5163
		d) 4555
		e) 3936

Answer 1

Installment Amount formula = [P * r * (1 + r)n] / [(1 + r)n - 1]

P = 7,000

r = 0.09 = 9%

n = 5

Installment would be = 1,800

Amount would rise because of accumulating rate of interest till first installment is paid. It will make it 7,000 * 1.09 = 7,630. Out of it, 1.800 is paid which leave 7,630 - 1,800 = 5,830

This 5,830 will accumulate rate of interest which will make it 5,830 * 1.09 = 6,354.7 at the end of year 2. Paying installment will leave 6,354.7 - 1,800 = 4,554.7 at the end of end of year 2.

Option D is correct.