Paul takes a loan of 225000 from the bank at 7 interest rate

Paul takes a loan of $225,000 from the bank at 7% interest rate per year over a 10-year period. He plans to pay off the loan in 10 yearly payments of $16,000 each, and with the money that he is going to inherit from his grand parents. How much should he inherit to pay off the entire loan if the grand parents give him the money at the end of the 4th year and he hands over the entire amount to the bank on the day he receives it?

Solution

Answer: Total Amount of Loan = $225000 Rate of interest 7% per year compounding annually. If the amount is paid in 4th Year then in that case it requires to calculte the future value of $225000 at the end of 4th Year. The compounding factor of interest is: (1+.07)^4 = 1.3108 So the future value of the Loan is = $(225000*1.3108) = $ 294,929.10 So Paul needs $294,929.10 amount to repay the loan to the bank at the end of 4th Year.