Question

Lee Associates borrowed $60,000. The company plans to set up a sinking fund that will pay back the loan at the end of 12 years. Assuming a rate of 8% compounded semiannually, the amount to be paid into the fund each period is_______ (use the tables in the handbook):

Answer 1

$1,535.21

Step-by-step explanation:

Given:

Amount borrowed = $60,000

Time period = 12 years

rate of interest = 8%

Sinking fund is created to pay off the amount borrowed after 12 years. It is required to compute periodic payments:

`P = ((r)/(m) )/((1+(r)/(m))^(n* m)-1)* A`

where r is 0.08

m = number of payments per year which is 2 (since it's semi annual)

n = number of years

A is amount of sinking fund

Substitute these values in the above formula:

`P = ((0.08)/(2) )/((1+(0.08)/(2))^(12* 2)-1)*60,000`

= $1,535.21

Therefore, $1,535.21 is paid into the fund each period.