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Harry borrows $3,500 from Mary. He agrees to repay the loan with annual payments, made at...

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Finance

Harry borrows $3,500 from Mary. He agrees to repay the loan withannual payments, made at the end of each year, of $500, $1,000,$1,500, etc. with a smaller final payment one year after the lastregular payment. Mary charges Henry a rate of discount 10%convertible 4 times per year. Determine the amount of the finalpayment.

Ans: At least $1670, but less than $1700.

Answer & Explanation Solved by verified expert
4.4 Ratings (1005 Votes)

EAR= (1+10%/4)^4-1=10.38% Below is the amortization schedule up to 3rd year

Year Initial Loan Interest @10.38%* Initial Loan Payment Outstanding Principal
0     3,500.00                                                     -                 -                          3,500.00
1     3,500.00                                            363.30      500.00                        3,363.30
2     3,363.30                                            349.11 1,000.00                        2,712.41
3     2,712.41                                            281.55 1,500.00                        1,493.96

Hence, amount of final payment to repay the loan at the end of 4th year= 1493.96*(1+10.38%)=$1649.03
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Transcribed Image Text

Harry borrows $3,500 from Mary. He agrees to repay the loan withannual payments, made at the end of each year, of $500, $1,000,$1,500, etc. with a smaller final payment one year after the lastregular payment. Mary charges Henry a rate of discount 10%convertible 4 times per year. Determine the amount of the finalpayment.Ans: At least $1670, but less than $1700.

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