Question

Bob borrowed $10,000 at an effective annual rate of interest of 7%.

Bob’s plan was to repay the loan with equal principal repayments plus interest at the end of each year for 20 years.

After the 10th payment, Bob decides to change his payment scheme and pay the outstanding balance with equal annual payments. The loan will still be repaid in 20 years.

Calculate the difference between the 10th and 11th payment.

1. Less than 174

2. At least 174, but less than 180

3. At least 180, but less than 186

4. At least 186, but less than 192

5. 192 or more

Answer 1

Less than 174

Difference=885-711.89=173.11

Payment	Loan beginning balance	Payment	Interest payment	Principal payment	Loan ending balance
1	10000	$1,200.00	$700.00	$500.00	$9,500.00
2	$9,500.00	$1,165.00	$665.00	$500.00	$9,000.00
3	$9,000.00	$1,130.00	$630.00	$500.00	$8,500.00
4	$8,500.00	$1,095.00	$595.00	$500.00	$8,000.00
5	$8,000.00	$1,060.00	$560.00	$500.00	$7,500.00
6	$7,500.00	$1,025.00	$525.00	$500.00	$7,000.00
7	$7,000.00	$990.00	$490.00	$500.00	$6,500.00
8	$6,500.00	$955.00	$455.00	$500.00	$6,000.00
9	$6,000.00	$920.00	$420.00	$500.00	$5,500.00
10	$5,500.00	$885.00	$385.00	$500.00	$5,000.00
11	$5,000.00	$711.89	$350.00	$361.89	$4,638.11
12	$4,638.11	$711.89	$324.67	$387.22	$4,250.89
13	$4,250.89	$711.89	$297.56	$414.33	$3,836.57
14	$3,836.57	$711.89	$268.56	$443.33	$3,393.24
15	$3,393.24	$711.89	$237.53	$474.36	$2,918.88
16	$2,918.88	$711.89	$204.32	$507.57	$2,411.31
17	$2,411.31	$711.89	$168.79	$543.10	$1,868.22
18	$1,868.22	$711.89	$130.78	$581.11	$1,287.11
19	$1,287.11	$711.89	$90.10	$621.79	$665.32
20	$665.32	$711.89	$46.57	$665.32	($0.00)