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.Which of the following answers is the closest to the amount they will 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. Use appendix Table 1, Table 2, Table 3 and Table 4.

Question

Quizplus · Accepted Answer

To find the present value of the amount needed, calculate the future value of the loans and then discount it back to the present using the grandparents' interest rate. The future value of the loans is $5,000 compounded at 4% for 0, 1, 2, and 3 years respectively. Then, discount this future value back to the present using a 6% interest rate. The closest amount is $16,813.

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