Question

Liz received a $35,850 loan from a bank that was charging interest at 5.50% compounded semi-annually.

a. How much does she need to pay at the end of every 6 months to settle the loan in 5 years?

Round to the nearest cent

b. What was the amount of interest charged on the loan over the 5-year period?

Round to the nearest cent

Answer 1

a) We can use the present value of the annuity formula to find the payment.

Where,
PVA = Present value of the annuity
A = Annuity or payment
i = Interest rate in decimal form (i.e 5.50% = 0.055)
n = Number of years
a = Number of payments in a year

b) Amount of interest charged:

Semi-annual payment = $4,149.27

Total number of payment = 5 * 2 = 10

Therefore, total amount paid = 4,149.27 * 10 = 41,492.70

So, total interest charged = Total amount paid - Amount of loan

=41,492.70 -  35,850.00

=$5,642.70