Five years ago, an investor borrowed 5,000 from a financial institution that charged a 6% annual interest rate, and he immediately took his family to live in Nepal. He made no payments during the time he was away. When he returned, he agreed to repay the original loan plus the accrued interest by making five end-of-year payments starting one year after he returned. If the interest rate on the loan is held constant at 6% per year, what annual payment must the investor make in order to retire the loan? A. 1 ,3 3 8 .23 . B . 1 ,5 8 8 .45. C. 1 ,63 8 .23 Can someone tell me why the answer is B instead of C ? I used N=6 to calculate the amount of the loan that has to be retired over the next 5 years BECAUSE he’ll be making payments AFTER 1 year from his return… Thank you
In 5 years the principle grows to $6,691.13:
n = 5
i = 6%
PV = $5,000
PMT = $0
Solve for FV = -$6,691.13.
Making payments at the end of each year:
PV = $6.691.13
n = 5
i = 6%
FV = 0
Solve for PMT = -$1,588.45.
Apparently the intention of the author was that the first payment be made one year from today.
If you think that the question was poorly worded, you won’t get an argument from me.