Barbara borrows $3500. She agrees to make monthly interest payments on the loan and will build...
Barbara borrows $3500. She agrees to make monthly interest payments on the loan and will build up a sinking fund with monthly deposits to repay the principal with a single payment 21 months from now. If the interest being charged on the loan is j12 = 8% and the interest being earned on the sinking fund is j12= 5.2%, what is the monthly cost of the debt for Barbara?
I got 182.95 but is wrong. please help
Homework Answers
Monthly interest paid on loan = amount borrowed * interest rate on loan / 12
Monthly interest paid on loan = $3,500 * 8% / 12 = $23.33
Monthly sinking fund payment is calculated using PMT function in Excel :
rate = 5.2%/12 (monthly rate earned on sinking fund = annual rate / 12)
nper = 21 (21 monthly deposits)
pv = 0 (beginning value of sinking fund is zero)
fv = -3500 (required value of sinking fund after 21 months)
PMT is calculated to be $159.56
Monthly cost of debt = Monthly interest paid on loan + Monthly sinking fund payment
Monthly cost of debt = $23.33 + $159.56
Monthly cost of debt = $182.89
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