A mortgage requires payments of $1000.00 at the end of every month for twenty-five years. If interest is 6% compounded semi-annually, calculate the principal of the loan.

Question

Quizplus · Accepted Answer

The principal of the loan can be calculated using the formula for the present value of an annuity: $P = PMT \times \left(\frac{1 - (1 + r)^{-n}}{r}\right)$, where PMT is the payment amount, r is the monthly interest rate, and n is the total number of payments. Given a 6% annual interest rate compounded semi-annually, the monthly interest rate is 0.5%. Over 25 years (or 300 months), the formula gives the principal value, which matches closest to option A.

A Mortgage Requires Payments of $1000