Question

Shahad has jat arranged a $20,000 loan from your bank at an annual rate of 10%. The loan calls for annual payments of $1,000 over the next 14 years and a final payment at the end of year 15. How big will the final payment (balloon) be ?

Answer 1

We know that,

Loan Amount = Present value of all the annual payments and final payment discounted at annual rate.

We have Given:

Loan Amount = 20000

Annual Rate = 10%

Annual Payment per year = 1000

We need to calculate:

Final Payment = ?

20000 = 1000/(1+0.1)^1 + 1000/(1+0.1)^2 +1000/(1+0.1)^3 +1000/(1+0.1)^4 +1000/(1+0.1)^5 +1000/(1+0.1)^6 +1000/(1+0.1)^7 +1000/(1+0.1)^8 +1000/(1+0.1)^9 +1000/(1+0.1)^10 +1000/(1+0.1)^11 +1000/(1+0.1)^12 +1000/(1+0.1)^13 +1000/(1+0.1)^14 + Final Payment/(1+0.1)^15

On solving:

20000 = 7366.687 + Final Payment/(1+0.1)^15

Final Payment = 52772.48 Answer

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