A friend of yours borrows $19 500 from the bank at 8% annually to be repaid in 10 equal annual end-of-year instalments.The interest paid on this loan in year 3 is

Question

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In year 3, the interest paid is calculated on the remaining balance of the loan after the first two years of payments. Since the loan is being repaid in equal annual installments, part of each payment goes towards the principal and part towards the interest. By year 3, the principal has been reduced by the payments made in the first two years, so the interest payment for year 3 is calculated on this reduced principal. The correct calculation involves amortization formulas or tables, which show that option A, $1336.01, is the correct amount of interest paid in year 3, reflecting the decreasing interest payment as more principal is paid off.

A Friend of Yours Borrows $19 500 from the Bank