Question

Your parents have recently taken out a 20-year loan for $400,000 towards a home renovation project. They've asked you to help them with their finances given your recent completion of the Finance course.

The loan payments are quarterly (every 3 months). The APR is 12%, compounded quarterly. Your parents have asked you to calculate the quarterly and annual payments that they need to budget for. What is the annual payment your parents will make towards the loan?

Round to the nearest dollar and input your answer in the following format (xx,xxx).

Answer 1

Annual payment

Information provided:

Present value= $400,000

Time= 20 years

Interest rate= 12%

The annual payment is calculated by entering the below in a financial calculator:

PV= -400,000

N= 20

I/Y= 12

Press the CPT key and PMT to compute the annual payment.

The value obtained is 53,551.51.

Therefore, the annual payment is $53,551.51.

Quarterly payment

Information provided:

Present value= $400,000

Time= 20 years*4= 80 quarters

Interest rate= 12%/4= 3% per quarter

The annual payment is calculated by entering the below in a financial calculator:

PV= -400,000

N= 80

I/Y= 3

Press the CPT key and PMT to compute the annual payment.

The value obtained is 13,244.70.

Therefore, the annual payment is $13,244.70.

In case of any query, kindly comment on the solution.