Question

Edgar has taken out a $6,250 unsubsidized Stafford loan to fund his four-year undergraduate degree. The loan has a duration of 10 years and an interest rate of 6.1%, compounded monthly. How much interest capitalization will have accrued by the time Edgar graduates? Round all dollar values to the nearest cent.

a.
$1,670.30
b.
$1,722.22
c.
$664.35
d.
$1,524.96

Answer 1

The present worth of the loan is $6,250

The start of payment will after 4 years

The nominal interest rate is 6.1% compounded monthly which is equal to 6.27% effective.

The future worth (after graduation) of the loan is

F = $6,250 (1 + 0.0627)^4 = $7,971.18

The interest is

$7,971.18 - $6,250 = $1,721.18

I didn't round off when solving these so it's not the exact answer among the choices but the closest is letter B $1,722.22

Explanation:

Answer 2

The present worth of the loan is $6,250
The start of payment will after 4 years
The nominal interest rate is 6.1% compounded monthly which is equal to 6.27% effective.

The future worth (after graduation) of the loan is
F = $6,250 (1 + 0.0627)^4 = $7,971.18

The interest is
$7,971.18 - $6,250 = $1,721.18
I didn't round off when solving these so it's not the exact answer among the choices but the closest is letter B $1,722.22