Question

Andy borrows funds of $ 1000 with an interest rate of 12% per year with an repayment period of 8 years and is repaid using the amortization method.

a) After paying installments at the end of year 4, A intends to pay them off. How much money must be paid for the repayment?

b) If after paying installments at the end of year 4, Andy requests that he be given an additional payment period of 6 years. i.e. the borrowing party requests an additional loan interest of 13% per year. How much installments per year do andy have to pay now?

Answer 1

(a) Calculation of Money to be paid for the repayment of loan at fourth year end:

First we shall calculate the amount of each installment to be paid @12%

PV of annuity=annuity*PV factor

1000= annuity*4.96764

annuity=1000/4.96764

=201.303

now we shall calculate the present value of four installments paid

pv of annuity=annuity*pv factor of annuity @12% for 4 years

=201.303*3.037349

=611.4271

So we can say that out of $1000 loan principal of $611.4271 has been paid.

remaning loan=1000-611.4271

=388.573

Future value of loan of $388.573 after four years @12% =388.573*1.573519

=611.4271

(B) As we have already calculated that the loan remaining at the 4th year end is 611.4271

now we need to calculate the annuity amount @13% rate for 6 years as follows:

PV of anuity=PV factor@13% 6 years*Annuity

611.4271 =3.99755*Annuity

annuity=611.4271/3.99755

=152.95(approx).

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