Question

You borrow $100,000 today. You will repay the loan with 20 equal annual payments starting in year 3 If the interest rate on the loan is 5% APR, compounded annually, how big is each payment?

Answer 1

for first 3 years there is no payment but interst will be accumulated along with the principal amount

ie. first year = (100000* 5%)+ 100000 = 105000

second year = 105000+ (105000*5%) = 110250

third year = 110250 + (110250* 5%) = 115762.5

When the repayment starts, the total amount will be 115762.5

r= 0.05

PV =115762.5

n = 20

P=(0.05* 115762.5)/(1-(1+0.05)^-20

=5788.125 /

ie, P = $9289.07