Nicola borrows a $24000 loan from Steve. She agrees to pay interest on the loan at the end of each year for 8 years, and will repay the capital by accumulation of a sinking fund. The sinking fund deposits are such that the net amount of the loan decreases linearly, resulting in a level repayment of principal at the end of each year. The interest rate on the loan is 5% over the first 4 years and 4.5% over the next 4 years. The sinking fund earns a fixed 4% interest rate per annum.
(a) Find the total amount of the 5th installment paid by Nicola. (Ans. $3600)
(b) Compare this with the case when Nicola repays the loan with 8 equal annual installments.
Principle amount repayment/year will be=24000/8=3000/yr
|Year||Amount o/s||Interest(5%/4.5%||Total||Repayment amount||Balance|
b) when Nicola repays the loan with 8 equal annual installments.=29250/8=3656.25/installment
Difference between two=3656.25-3540=116.25
Get Answers For Free
Most questions answered within 1 hours.