In: Finance
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?
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. | |||||||