Question

How much interest is payable each year on a loan of P15,000 for a spray paint tank if interest rate is 10% per year when half of the loan principal will be repaid as a lump sum amount at the end of three years and the other half will be repaid in one lump sum amount at the end of 6 years? How much interest will be repaid over the 6-year period?

In problem above, if the interest has not been paid each year but allowed to compound, how much interest would be due to the lender as a lump sum at the end of the sixth year? How much extra interest is being paid here as compared to the interest calculated in problem above. What is the
reason for the difference?

Answer 1

The answers, calculation and formulas used are provided in the following attached image file :

The interest paid per year for the first 3 years are = P1500

Interest paid per year for next 3 years are = P750

Total interest paid in 6 years = P6750

If interest is compounded, then total interest payable in 6 years = P7447.50 [Since, half of principal is paid after 3 years, we have to compound the interests twice for first 3 years and for next 3 years with different principals]

Extra interest paid = P697.50