Question

You are taking a $6,226 loan. You will pay it back in four equal amounts, paid every year, with the first payment occurs at the end of year 5. So the first payment is 5 periods from now. Even though you did not make payments during that time interest still accrues. The annual interest rate is 11%. Calculate the amount of each annual payment to pay off the loan 4 years after you start paying it back.

Answer 1

annual payment = $2,362.88

Step-by-step explanation:

we must first calculate the future value of the loan at the end of year 4 = $6,226 x (1 + 11%)⁴ = $9,451.51

using the present value of an annuity formula we can determine the annual payment:

annual payment = present value of an annuity / PV annuity factor

• present value of an annuity = $9,451.51
• PV annuity factor 11%, 4 periods = 3.1024

annual payment = $9,451.51 / 3.1024 = $2,362.88