A bank has agreed to loan you $10,000 at 11% for 5 years. You are required to make equal, annual, end-of-year payments that include both principal and interest on the outstanding balance. Determine the amount of these annual payments (to the nearest dollar).

Question

Quizplus · Accepted Answer

Using the formula for annuity payment:
PMT = R(1 - (1 + R)^(-n)) / i
where:
R = annual interest rate (11%)
n = number of periods (5 years)
i = interest factor [(1 + R)^n - 1]

Plugging in the values:
PMT = 10,000(0.2145) / 0.11
PMT = $2,706.82

Rounding to the nearest dollar, the answer is $2,706. Therefore, the best choice is C).

A Bank Has Agreed to Loan You $10,000 at 11