Joe borrowed $10,000 at 10% per year and promised to pay it back in equal annual installments at the end of each of the next 5 years.Joe's payment will be $2,100 [($10,000/5)+ ($10,000 × 10%)].

Question

Quizplus · Accepted Answer

The calculation does not account for the decreasing principal balance over time, which affects the interest portion of the payments. The correct calculation should use the formula for an amortizing loan, which would result in different, typically decreasing, interest amounts each year and not a flat $2,100 payment.

Joe Borrowed $10,000 at 10% Per Year and Promised to Pay