Question

On the day you entered college, you borrowed $30,000 from your local bank. The terms of the loan include an interest rate of 4.75 percent. The terms stipulate that the principal is due in full one year after you graduate. Interest is to be paid annually at the end of each year. Assume that you complete college in four years. How much total interest will you pay on this loan assuming you paid as agreed? (Hint: This is simple interest, not an amortized loan)a. $7,267b. $7,400c. $7,125d. $1,500e. $1,425

Answer 1

The answer is: C) $7,125

Step-by-step explanation:

The loan's principal is $30,000.

Yearly interest 4.75% (simple)

5 periods (four college years plus one)

Simple interest is charges, so we use the following payment schedule:

1. Payment year 1 = $30,000 x 4.75% = $1,425 (only interest)
2. Payment year 2 = $30,000 x 4.75% = $1,425 (only interest)
3. Payment year 3 = $30,000 x 4.75% = $1,425 (only interest)
4. Payment year 4 = $30,000 x 4.75% = $1,425 (only interest)
5. Payment year 5 = ($30,000 x 4.75%) + $30,000 = $31,425 (interest and principal)

At the end of the five years, a total of $7,125 will have been paid only in interest.