Question

In: Finance

Afra has borrowed $6000 and agreed to pay it back in three equalpayments to be...

Afra has borrowed $6000 and agreed to pay it back in three equal payments to be made in 3 months intervals from today (i.e. 3 months from today, 6 months from today and 9 months from today). Find the size of the payments if interest is 5% p.a. compounding semi-annually.

Expert Solution

Afra's Loan amounting is $6000

She will pay in 3 equal Quarterly payments starting at the end of each period.

firstly, Calculating the Nominal Interest rate compounded quarterly from Nominal Interest rate compounded semi-annually using EAR formual:-

where, r1 = Nominal Interest rate compounded quarterly

m1 = No of times compounding in a year = 4

r2 = Nominal Interest rate compounded Semi-annually = 5%

m2 = No of times compounding in a year = 2

taking 4-root on both sides,

r1 = 4.9691%

So, Nominal Interest rate compounded quarterly is 4.9691%

Now, Calculating the Equal Payments:-

Where, P = Loan amount = $6000

r = Periodic Interest rate = 4.9691%/4 = 1.242275%

n= no of periods = 3

Quarterly Payments = $2049.90

So, the size of the equal payments is $2049.90

jeff jeffy answered 2 years ago

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