The Export Development Corp. (EDC) offered a $500,000 startup loan to qualifying entrepreneurs. For year one of the loan, it was interest and payment free. Subsequently, there was a two-year period where interest only payments were made at the end of each year. In Year 4, both interest and principal payments were made. The loan had to be repaid at the end of Year 8. If the interest rate charged in years 2 through 8 remained at 8% compounded annually, what was the total interest paid on the entire EDC loan.

Question

Quizplus · Accepted Answer

To calculate the total interest paid on the loan, we need to find the interest paid each year and add them up for years 2 through 8.

In year 2, the interest payment would be $500,000 x 0.08 = $40,000
In year 3, the interest payment would also be $40,000
In year 4, both interest and principal payments were made. The interest payment would be $500,000 x 0.08 = $40,000
In year 5, the interest payment would be $500,000 x 0.08 = $40,000
In year 6, the interest payment would be $500,000 x 0.08 = $40,000
In year 7, the interest payment would be $500,000 x 0.08 = $40,000
In year 8, the interest payment would be $500,000 x 0.08 = $40,000

Adding up all of these interest payments, we get a total of $280,000. Therefore, the total interest paid on the loan is $280,000.

Option E is the best choice as it matches the calculated result.