Question

A bank offers you a $72,000, 4-year term loan (to be fully amortized over 4 years) at an annual interest rate of 7%. What will your annual loan payment be?

Group of answer choices

$20,720

$23,014

$21,256

$19,704

Which one of the following terms is used to describe a loan whereby the borrower pays only a lump sum at maturity; no other payments are made by the borrower:

Group of answer choices

fully amortized loan

interest-only loan

modified loan

pure discount loan

Answer 1

Answer : Correct Option is $21,256

Explanation :

Calculation of Annual Payment

Annual Payment = Principal * rate * {(1 + r)^n } / {[(1 + r)^n ] - 1 }

where

Principal = $72000

r is the rate of interest i.e 7% or 0.07

n is the number of payments 4

Annual Payment = 72000 * 0.07 * {(1 + 0.07)^4 } / {[(1 + 0.07)^4 ] - 1 }

= 72000 * 0.07 * {1.31079601} / {1.31079601 - 1 }

= 5040 * {1.31079601 / 0.31079601}

= 5040 * 4.217544524

= 21,256.4244 or $21,256

Answer : Correct Option is pure discount loan

Reason :

Pure Discount loan is the type of loan where borrower receives money today but pays only a lump sum at maturity; no other payments are made by the borrower