Question

PLEASE HELP clear up my confusion! Carrie took out a $12,000 personal loan to pay off her credit cards. She will not make a payment for 2 years and there is a 5% interest rate. How much will be owed in 2 years with monthly compounding?

I know this is relatively simple but the variable that she doesn't pay for 2 years is confusing me on how to set up the problem.

Answer 1

$13,259.30

Explanation:

The account balance with compound interest is ...

A = P(1 +r/n)^(nt)

A = $12,000(1 +0.05/12)^(12·2) ≈ $13,259.30 . . . . will be owed in 2 years

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It's a straight compound interest problem. "No payments for 2 years" means the account continues to accrue compounded interest. It's basically a future-value problem, as opposed to an amortization or annuity problem where payments are involved.