A 30-year loan of L is going to be repaid with annual payments made at the end o

Question

A 30-year loan of L is going to be repaid with annual payments made at the end of the year. The bank charges an annual effective rate of interest of 10% on the loan. . One option is to use the Amortization Method and make level payments of size 2000 at the end of each year. . The second option is to use the Sinking Fund Method where yearly payments are made at the end of the year starting with a payment of size X and increasing the size of each successive payment by 5% each year. The payments in the sinking fund gain an annual effective interest rate of 8%. Find X. Round your answer to the nearest whole number.

Explanation / Answer

Total Payment made in 30years=2000*30=60000 PV of a growing annuity=X/(r-g)[1-((1+g)/(1+r))^n], where X=Annuity Amount, n=number of years,r=interest rate,g=growth rate. (X/(0.08-0.05))*(1-(1.05/1.08)^30)=60000 or X*0.57/(0.03)=60000 or X=60000*0.03/0.57=3157.90

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.