If a student borrows $20,000 to start a business as a 5 year,10% loan,assume annual payments,the decrease in principal in year 1 is

Question

Quizplus · Accepted Answer

The formula for calculating annual payments for a loan is:
Annual Payment = (Loan Amount * Interest Rate) / (1 - (1 + Interest Rate)^-n)
Where n is the number of years (in this case, 5).
Plugging in the values for the given loan:
Annual Payment = (20,000 * 0.1) / (1 - (1 + 0.1)^-5) = 5,275.95
This means that the borrower will make payments of $5,275.95 each year for 5 years.
In the first year, the interest paid is 10% of the original loan amount, which is $2,000. The rest of the annual payment goes towards decreasing the principal. Therefore, the decrease in principal in year 1 is:
$5,275.95 - $2,000 = $3,275.95
So, the correct answer is B.

If a Student Borrows $20,000 to Start a Business as a 5