Question

As the credit manager of a local bank, you decided to give 10,000$ credit to your customer. The customer agreed to pay back this loan as 4 equal payments. If the interest rate is 7%, what is the interest payment which must be paid in year two?(15 Points)

502.98

542.34

590.50

550.26

Answer 1

B.542.34

first let us know the annual payments;

P *r* (1+r)^n / [(1+r)^n-1]

here,

P =10,000

r=7%=>0.07.

n = 4

=>10,000*0.07*(1.07)^4 / [(1.07)^4-1]

=>917.557207 / 0.31079601

=>$2,952.28.

now,

interest payment of first year = $10,000 out standing *7%=>$700.

principal paid off in the first year = $2,952.28 - 700=>$2,252.28

principal outstanding at the beginning of second year = $10,000 first year balance- 2,252.28 paid off

=>$7,747.72.

interest payment in second year = $7,747.72*7%

=>$542.34.