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In: Finance

You borrow $20,000 from your parents to make a house down payment at a mutually agreedupon...

You borrow $20,000 from your parents to make a house down payment at a mutually agreedupon annual interest rate of 5%, and a payback period of 5 years (direct reduction loan). What will be your annual, or monthly, payment amounts?

Solutions

Expert Solution

This problem can be solved using the Present value of Future Annuity
Present value of annuity is = P*(1-(1+r)^-n/r)
Present value of Future annuity is = loan borrowed = $ 20,000 /-
r is Rate of Interest = 5%
n is no of years = 5
P is Annual Payment = ?
20000=P*(1-(1+0.05)^-5/0.05)
20000=P*4.329476671
P is Annual Payment = $ 4,619.50 /- Approx.
If repayment is made monthly :-
Present value of annuity is = P*(1-(1+r)^-n/r)
Present value of Future annuity is = loan borrowed = $ 20,000 /-
r is Rate of Interest = 0.42%
n is no of years = 60 months
P is Monthly Payment = ?
20000=P*(1-(1+0.004167)^-60/0.004167)
20000=P*52.99
P is Monthly Payment = $ 377.40 /- Approx.

jeff jeffy answered 2 years ago
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