Question

Consider an individual who decides to take a loan of $10000 and is expected to repay the loan in 10 years. Assume that the interest rate is fixed and equal to 0.07 per year. For simplicity assume that the process of repayment requires a single fixed payment at the end of each year.

i) Find the amount that the individual has to pay each year

ii) How much does the individual owe at the beginning of the second period? What part of the principal has been paid off?

iii) Find the amount that the individual has to pay each year if the individual chooses to defer the process of repayment for two years.

iv) Find the amount that the individual has to repay at the end of year 10if she chooses to extend the loan repayment process to 15 years.

v) How long would the individual be repaying the loan if she chose to pay each year twice the amount you found in part i?

vi) How much should the individual repay each year to keep her level of debt stable?

Answer 1