On the day you enter college, you work out a deal with your local bank such that you borrow $9,600 for four years. The terms of the loan include an interest rate of 5.9%. The terms also stipulate that the principle is due in full one year after you graduate. Interest is to be paid annually at the end of each year. Assume that you complete college in four years. How much will you pay the bank one year after you graduate?

Question

Quizplus · Accepted Answer

The total amount paid one year after graduation includes the original principal plus the interest accumulated over five years. The annual interest payment is calculated as $9,600 * 5.9% = $566.40. Over four years in college, this amounts to $566.40 * 4 = $2,265.60 in interest payments. After graduation, the principal of $9,600 is due, along with one more year of interest payment ($566.40), totaling $9,600 + $2,265.60 + $566.40 = $12,432.00. However, the question asks for the amount paid one year after graduation, which includes the principal and the final year's interest, not the total of all interest payments made. Therefore, the correct calculation should be the principal ($9,600) plus one year of interest ($566.40), which equals $10,166.40.

On the Day You Enter College, You Work Out a Deal