[wind_blast942]

Hi all

Regarding this question:

Suppose you borrowed $25,000 at a rate of 8% and must repay it in 4 equal installments at the end of each of the next 4 years. How much interest would you have to pay in the first year?

The answer given was $2,854.13.

I calculated the installment to be $7548.02 over 4 years. However I do not understand why the answer is not $2000 instead, as interest in the first year should be 8% of $25000 = $2000.

Thanks for the help in advance.

[morgaine300]

I agree with your $2000 so I can't tell you. The installments include the interest, and interest and principle will change with each payment, but that first payment should include $2000 of interest since it's due on the entire $25,000 with nothing applied to principle yet.

The only thing I can imagine is that they've got some weird definition of "4 equal installments." There are other ways to do loans (equal payment of principle plus interest, interest only, etc.), but I'm not thinking of any way around that $2000.

If Arcsine pops around, maybe he'll see something I don't.

[ArcSine]

Sorry... can't add anything fresh. I re-assembled the building blocks a couple or three different ways, but couldn't reproduce the given answer. I'm in agreement with both of you that the first year's interest should indeed be 2K, under a standard level-amortizing loan.

Even if the interest compounded daily, the first year's tot interest would only be 2,081.94.

WindBlast, check the book's background material--or check in with the instructor--to see if you can find the non-standard feature of this particular loan that creates a nearly 11 1/2% effective rate for the first year.

[wind_blast942]

I checked with my instructor and he admitted that he had given the wrong answer. It should be $2000 after all. Thanks for all the help.

[ArcSine]

I appreciate the follow-up, WB... thanks.