Lou Lewis borrows $10,000 to be repaid over 10 years at 9 percent. Repayment of principal in the first year is:

Question

Quizplus · Accepted Answer

The formula to calculate the annual payment on a loan is:

PMT = P * (r / (1 - (1 + r)^(-n)))

Where:

PMT = Annual payment
P = Principal amount borrowed
r = Interest rate per period
n = Total number of periods

Substituting the given values, we have:

PMT = 10,000 * (0.09 / (1 - (1 + 0.09)^(-10)))
PMT = 1,311.39

So, the annual payment for the loan is $1,311.39. To calculate the principal payment for the first year, we need to subtract the interest payment from this amount. The interest payment for the first year can be calculated as:

Interest = P * r
Interest = 10,000 * 0.09
Interest = 900

Subtracting the interest payment from the annual payment, we have:

Principal payment = PMT - Interest
Principal payment = 1,311.39 - 900
Principal payment = 411.39

Therefore, the principal payment in the first year is $411.39 (rounded to the nearest dollar), which corresponds to option B.

Lou Lewis Borrows $10,000 to Be Repaid Over 10 Years