Question

A loan is being repaid in equal annual installments at 4% effective per annum. If the principal repaid in the next to the last installment is $100, find the interest contained in the installment due 5 years before the last installment.

Answer 1

Sol:

Principal = $100

Interest rate (r) = 4%

Period (n) = 5 years

To determine interest contained in the installment (Ii) due 5 years before the last installment is as follows,

Each installment consist of $100 as principal amount per year which last for 5 years, therefore principal overdue will be 100 x 5 = 500

Total principal = 100 x 5 = 500

Ii = Total principal x Interest rate

Ii = 500 x 4%

Ii = $20

Therefore interest contained in the installment due 5 years before the last installment is $20