Question

Edward borrows 720,000 at AEIR 6%. At the end of each of the first 6 years he will pay 36,000 in principal alone, plus he pays the interest due.

At the end of each of the next eight years he makes level (total) payments of 50,000.

He plans on making one final payment at the end of 15 years to satisfy the loan obligation.

What is this 15th payment?

	A.	362,932
	B.	The answer is not listed here
	C.	324,122
	D.	226,864
	E.	326,932

Answer 1

Initial Principal = $ 720,000

Principal payment made each year for the initial 6 years = $ 36,000

Total Principal paid in the initial 6 years = $ 36,000 x 6 = $ 216,000

Principal outstanding at the end of 6 years = $ 720,000 - $ 216,000 = $ 504,000

Based on this principal outstanding of $ 504,000 and annual equivalent interest rate of 6%, Edward continues to make level payments of $ 50,000 every year for the next 8 years. An amortization table for the same is as given below.

Year	POS	Interest	Payment	Principal repaid
0	504,000	30,240	50,000	19,760
1	484,240	29,054	50,000	20,946
2	463,294	27,798	50,000	22,202
3	441,092	26,466	50,000	23,534
4	417,558	25,053	50,000	24,947
5	392,611	23,557	50,000	26,443
6	366,168	21,970	50,000	28,030
7	338,138	20,288	50,000	29,712
8	308,426

Basis the above table, the Principal outstanding at the end of the next 8 years is $ 308,426.

Since Edward wishes to make one final payment to settle this loan obligation in this final year, he would need to pay the outstanding principal of $ 308,426 along with the 6% interest on it i.e. 6% of $ 308,426 = $ 18,506

Thus, total payment to be made = $ 308,426 + $ 18,506 = $ 326,932 (Option E)