You plan to borrow $40,000 at a 6% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How m

You plan to borrow $40,000 at a 6% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2

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  1. Answer:

    Interest for second year $2,114.08

    Explanation:

    given data

    loan Amount = $40,000.00  

    Interest rate r = 6.00%  

    time period t = 7  

    solution

    we get here first Equal Monthly Payment EMI that is express as

    EMI = [tex]\frac{P \times r \times (1+r)^t}{(1+r)^t-1}[/tex]      …………….1

    here P is Loan Amount and r is rate and t is time period  

    put here value and we get  

    EMI = [tex]\frac{40000 \times 0.06 \times (1+0.06)^7}{(1+0.06)^7-1}[/tex]    

    EMI = $7165.40  

    now

    we get here interest for second year that is

    Closing balance at year 1 = opening balance + Interest – EMI Payment

    Closing balance at year 1 =  $40,000  + $2400 – $7165.40  

    Closing balance at year 1 =   $35234.60

    so Interest for second year $2,114.08

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