Annuity You are going to borrow money from the bank. But when considering your income, you...

Annuity You are going to borrow money from the bank. But when considering your income, you could afford to spend maximum 4000 euros per year as total repayments . Now, If the loan interest rate is 8% , what would be the maximum loan amount which you can borrow from the bank If the loan has duration of 5 years and the annual loan payment are calculated on the basis of annuity? Find also , what are the second year loan Principal and interest payments.

Solutions

Expert Solution

maximum loan amount = (annual payment/interest rate)*[1 - 1/(1+interest rate)^duration]

maximum loan amount = (4000/0.08)*[1 - 1/(1+0.08)⁵] = 50,000*[1 - 1/1.08⁵] = 50,000*[1 - 1/1.4693] = 50,000*(1 - 0.6806) = 50,000*0.3194 = 15,970

second year loan Principal is $2,939.96 and interest payment $1,059.82.

Formulas

jeff jeffy answered 2 hours ago

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