Question

A loan is repaid in ten equal annual installments with the first installment paid one year after the loan is made. The effective annual interest rate is 4%. The total amount of principal repaid in the fifth, sixth, and seventh payments combined is $6,083. What is the total amount of interest paid in the second, third, and fourth payments combined?

1. Less than $2,000

2. At least $2,000, but less than $2,020

3. At least $2,020, but less than $2,040

4. At least $2,040, but less than $2,060

5. $2,060 or more

Answer 1

By hit and trial of total amount of principal in 5th, 6th and 7th payment combined We find that Amount of principal or loan=20000

Amortization Schedule:

Payment	Loan beginning balance	Payment	Interest payment	Principal payment	Loan ending balance
1	20000	$2,465.82	$800.00	$1,665.82	$18,334.18
2	$18,334.18	$2,465.82	$733.37	$1,732.45	$16,601.73
3	$16,601.73	$2,465.82	$664.07	$1,801.75	$14,799.98
4	$14,799.98	$2,465.82	$592.00	$1,873.82	$12,926.16
5	$12,926.16	$2,465.82	$517.05	$1,948.77	$10,977.39
6	$10,977.39	$2,465.82	$439.10	$2,026.72	$8,950.66
7	$8,950.66	$2,465.82	$358.03	$2,107.79	$6,842.87
8	$6,842.87	$2,465.82	$273.71	$2,192.10	$4,650.77
9	$4,650.77	$2,465.82	$186.03	$2,279.79	$2,370.98
10	$2,370.98	$2,465.82	$94.84	$2,370.98	($0.00)

Amount of interest in 2nd 3rd and 4th payment combined=1989.44 i.e., Less than $2,000