Harry borrows $3,500 from Mary. He agrees to repay the loan with annual payments, made at...

Harry borrows $3,500 from Mary. He agrees to repay the loan with annual payments, made at the end of each year, of $500, $1,000, $1,500, etc. with a smaller final payment one year after the last regular payment. Mary charges Henry a rate of discount 10% convertible 4 times per year. Determine the amount of the final payment.

Ans: At least $1670, but less than $1700.

Expert Solution

EAR= (1+10%/4)^4-1=10.38% Below is the amortization schedule up to 3rd year

Year	Initial Loan	Interest @10.38%* Initial Loan	Payment	Outstanding Principal
0	3,500.00	-	-	3,500.00
1	3,500.00	363.30	500.00	3,363.30
2	3,363.30	349.11	1,000.00	2,712.41
3	2,712.41	281.55	1,500.00	1,493.96

Hence, amount of final payment to repay the loan at the end of 4th year= 1493.96*(1+10.38%)=$1649.03

jeff jeffy answered 1 year ago

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