Question

A firm has borrowed $5,000,000 for 3 years at 10% interest, compounded annually. It makes no payments until the loan is due, and then pays the loan off as a lump sum. What is the payoff amount at the end of year 3?

Answer 1

$6,655,000

Step-by-step explanation:

`A = P(1\ +\ r)^(n)`

wherein, A= Amount

P= Principal

R= Rate of interest per annum

n = term to maturity

Pay off amount at the end of year 3 = $5,000,000
`(1\ +\ .10)^(3)`

Amount = $5,000,000 × 1.331 = $ 6,655,000

Amount due of a borrowing is equal to the money borrowed initially compounded at a rate of interest for a known period.

Above. rate of interest is 10%, since the money has been repaid only upon due date, three year compounding of the said sum at 10% per annum rate of interest yields the payoff amount which is $6,655,000