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

Question

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The interest paid in year three can be calculated using the amortization formula or an amortization schedule. In the third year, the interest is part of the annual payment, which also includes principal repayment. The interest portion decreases each year as the outstanding principal decreases. To find the exact interest paid in the third year, you would typically use the loan's amortization schedule, which breaks down each payment into interest and principal components. Given the information, the correct calculation involves understanding that as the loan progresses, more of the annual payment goes towards the principal and less towards the interest. The provided answer, $1,336.01, accurately reflects the interest portion of the third year's payment under these conditions, assuming the loan is amortized evenly over 10 years with a fixed annual interest rate of 8%.

A Friend of Yours Borrows $19,500 from the Bank at 8