Question

Sean's lawn service needs $6,000.00 today and borrow the money from Bill’s bank. Bill’s bank requires interest payments paid at the end of each quarter for five years according to a 5.5% simple interest rate as well as the full $6,000.00 at the end of five years. To reach the $6,000.00 obligation after 5 years, Sean’s lawn service sets up a sinking fund earning 5.5% quarterly. Find the total quarterly obligation for Sean’s lawn service.

Answer 1

Sean's lawn service needs today and borrows the same through Bill's Bank= $6000

Bill's Bank required Sean lawn service to pay Quarterly Interest at the end of each quarter.

Quayerly Payment = Loan amount*Interest Rate*1/4

= $6000*5.5%*1/4

= $82.5

So, Quarterly Interest payment = $82.5

Sean Lawn service also sets up Sinking Fund account to accumulate borrowed balance at the end of 5 Yaer.

Calculating the periodic quarterly Payment into Sinking Fund:-

where, P = Periodic payment

r = Interest rate = 5.5%

n - no of periods = 5

m = no of times compounding = 4

Sinking Fund = $6000

P = $262.68

Quarterly Payment into Sinking Fund = $262.68

So, the total quarterly obligation for Sean’s lawn service = $82.5 + $262.68

= $345.18

answered by: anonymous