Question

Prob Set 1 10:

10. A bank just approved your small business loan for $35,000. The loan has an interest rate of 8.5% and will be repaid quarterly over ten years. What are the required quarterly loans payments?

Answer 1

Solution:-

Amount of loan = $35,000

Since the loan is to be paid quarterly, hence we have to divide the annual interest rate by 4 to get periodic interest rate.

Periodic interest rate (PIR)=8.5%/4 =2.125%

Numbers of installment(N)= Numbers of years *4= 10*4 = 40 installments

Required quarterly payments

            = Amount of loan/ cumulative PVIFA(2.125%,40)

Where Cumulative PVIFA=[ 1-{1/(1+PIR)ⁿ}]/PIR

                                 =[1-{1/(1+0.02125)⁴⁰}]/0.02125

                                =26.76526

                                                     =$35000/26.76526

                                                      =$1307.665

Hence the required quarterly payment = $1307.67

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