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?

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 1 year ago

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

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