You just borrowed $12,750 from the bank to use in your business. The loan terms require you to pay the interest annually with the entire principle due in six years. The interest rate is 8.95%. How much
Will you pay to the bank in year ﬁve of the loan?

Question

Quizplus · Accepted Answer

To determine the amount to be paid in year five, we need to calculate the remaining balance on the loan after the fourth payment has been made. Each payment will be for the annual interest, which can be calculated as:

Annual interest = (Interest rate)(Loan amount) = (0.0895)($12,750) = $1,142.88 (rounded to the nearest cent)

After four payments, the remaining balance on the loan can be calculated using the present value formula for an annuity:

Present value = Payment / (Interest rate) x (1 - 1 / (1 + Interest rate)^(Number of payments))

Number of payments = 6 - 4 = 2
Payment = $1,142.88
Interest rate = 0.0895

Present value = $1,142.88 / (0.0895) x (1 - 1 / (1 + 0.0895)^2) = $2,567.67 (rounded to the nearest cent)

Therefore, the amount to be paid in year five will be the remaining balance plus the annual interest payment:

Amount = $2,567.67 + $1,142.88 = $3,710.55

Rounded to the nearest cent, the closest answer choice is B) $1,141.13.

You Just Borrowed $12,750 from the Bank to Use in Your