Question

A person borrows $200that he must repay in a lump sum no more than 8 years from now. The interest rate is 8.5% annually compounded. The borrower can repay the loan at the end of any earlier year with no prepayment penalty.a.What amount will be due if the borrower repays the loan after 1 year

Answer 1

$217

Step-by-step explanation:

The option chosen is that repayment of the loan would take place after a year, in other words, after 1 year the borrower would repay the principal plus the interest that has accrued on the loan over the one year period.

1 year interest on loan=principal*interest rate

1 year interest on loan=$200*8.5%

1 year interest on loan=$ 17

total amount due in one year=$200+$17=$217

Alternatively, we can determine the worth of the loan after one year using the future value formula as shown thus:

FV=PV*(1+r)^n

PV=loan amount=$200

r=annual interest rate=8.5%

n=number of years=1

FV=$200*(1+8.5%)^1

FV=$217