Use the appropriate formula to find the amortization payment you would need to make each three months, at 8% interest compounded quarterly, to pay off a loan of $8,000 in 6 years.
A) $1,730.52
B) $422.97
C) $1,288.29
D) $316.61

Question

Quizplus · Accepted Answer

The correct choice is found by using the formula for the payment of an amortizing loan: $P = \frac{rPV}{1 - (1 + r)^{-n}}$, where $P$ is the payment, $r$ is the interest rate per period, $PV$ is the present value or initial loan amount, and $n$ is the number of periods. Here, $r = 0.08/4 = 0.02$ (since the interest is compounded quarterly), $PV = 8000$, and $n = 6 \times 4 = 24$ (since payments are made quarterly over 6 years). Plugging these values into the formula gives a payment of approximately $422.97 every three months.

Use the Appropriate Formula to Find the Amortization Payment You