Question

You are looking to take out a ​$53 ​,000 loan to pay for school. The loan would be a​ five-year loan. The lender offers you a 8 ​% interest rate on the loan and also offers to structure it in one of three​ ways: ​a) As a discount loan ​b) As an​ interest-only loan ​c) As an amortized loan. Rounded to the nearest whole​ dollar, what will be your balance at the end of year 1 if you take the loan as​ a: ​a) discount​ loan?  nothing ​b) interest-only​ loan? nothing ​c) amortized​ loan? nothing Which of these loans will collect the lowest amount of interest over the life of​ loan? A. amortized loan B. ​interest-only loan C. discount loan

Answer 1

You are looking to take out a ​$53 ​,000 loan to pay for school. The loan would be a​ five-year loan. The lender offers you a 8 ​% interest rate on the loan and also offers to structure it in one of three​ ways: ​a) As a discount loan ​b) As an​ interest-only loan​c) As an amortized loan. Rounded to the nearest whole​ dollar,

what will be your balance at the end of year 1 if you take the loan as​ a: ​

a) discount​ loan? = Loan Amount / (1 + Interest)^(Remaining Years) = $53000 / 1.08^4 = $38957

​b) interest-only​ loan? = Loan Amount = $53000 (Because in interest only loan principal will be paid at the end of Loan term)

​c) amortized​ loan? = Loan Amount - Annual payment + Interest = $53000 + 53000 * 8% - $13274.19 = $43966

Loan Payment in amortized loan = Loan amount / PV annuity factor(8%,5) = 53000 / 3.9927 = 13274.19

Which of these loans will collect the lowest amount of interest over the life of​ loan? A. amortized loan (amortized loan will have cheapest interest as the principal will get reduced with each annual payment