Question

A loan is to be paid off in twenty annual installments of $100, with the first payment due one year after the loan is made. What is the total amount of principal paid in the even numbered installments, if the effective rate of interest is 4%?

Answer 1

Total amount of principal paid = $ 1,359.03

Step-by-step explanation:

This method of loan repayment is known as loan amortization

Loan Amortization: A loan repayment method structured such that a series of equal periodic installments will be paid for certain number of periods to offset both the loan principal amount and the accrued interest.

The value of the loan can be worked as follows:

Loan amount = A× (1- (1+r)^(-n))/r

A- annual installment

r - annual interest rate

n- number of years,

Loan amount = ?

Loan amount = 100 × (1 - (1+0.04)^(-20) )/ 0.04

Loan amount = 1,359.032

Total amount of principal paid = $ 1,359.03