You received a $5,000 loan at the end of each of your four years of college. Your grandparents agreed to pay off your loans at the end of your fourth year of school. Assume a 4% annual compound interest rate on student loans. How much will they have to deposit when you start school so that they will have enough money to pay off your loans after four years? Their interest rate is 6% compounded annually.
A) $20,000.
B) $21,235.
C) $16,818.
D) $15,000.
E) None of the other answers are correct.

Question

Quizplus · Accepted Answer

To find the amount your grandparents need to deposit, calculate the future value of each $5,000 loan at 4% interest for the respective number of years, then find the present value of the total amount needed using a 6% interest rate. The calculations show that $16,818 is the correct amount to deposit.

You Received a $5,000 Loan at the End of Each