Question

A loan of $1000 is to be paid off in 10 equal annual payments. The interest rate is 5% per year compounded annually.

A) If the first payment is made at EOY 1, what is the annual payment?
B) If the first payment is made at EOY 0, what is the annual payment?

Answer 1

a. $129.50

b. $123.34

Step-by-step explanation:

We are Calculating the Annual Payment Using the TVM Calculation,

a. PV = 1,000, FV = 0, T= 10, I = 0.05. If the first payment is made at end of year 1, the TVM calculator is adjusted to End mode

Annual payment = PMT(PV, FV, T, I]

Annual payment = PMT( 1,000, 0, 10, 0.05)

Annual payment (PMT) = $129.50

b. PV = 1,000, FV = 0, T= 10, I = 0.05. If the first payment is made at end of year 0, the TVM calculator is adjusted to Beginning mode

Annual payment = BEG PMT(PV, FV, T, I]

Annual payment = BEG PMT( 1,000, 0, 10, 0.05)

Annual payment (PMT) = $123.34