Table 1-1 details three different loan repayment plans described below. Each plan repays a $6,000 loan in 6 years at 10 % per year interest. A - Plan 1: Simple interest paid annually, principal repaid at end. The accrued interest is paid each year, and the entire principal is repaid at the end of year 6. B - Plan 2: Compound interest and portion of principal repaid annually. The accrued interest and one-sixth of the principal (or $1000) is repaid each year. The outstanding loan balance decreases each year, so the interest for each year decreases. C- Plan 3: Equal payments of compound interest and principal made annually. Equal payments are made each year with a portion going toward principal repayment and the remainder covering the accrued interest. Since the loan balance decreases at a rate slower than that in plan 2 due to the equal end-of-year payments, the interest decreases, but at a slower rate. End Of Year Interest Owed For Year Total Owed At End-Of-Year End-Of-Year Payment Total Owed After Payment TABLE 1-1

Table 1-1 details three different loan repayment plans described below. Each plan repays a $6,000 loan in 6 years at 10 % per year interest. A - Plan 1: Simple interest paid annually, principal repaid at end. The accrued interest is paid each year, and the entire principal is repaid at the end of year 6. B - Plan 2: Compound interest and portion of principal repaid annually. The accrued interest and one-sixth of the principal (or $1000) is repaid each year. The outstanding loan balance decreases each year, so the interest for each year decreases. C- Plan 3: Equal payments of compound interest and principal made annually. Equal payments are made each year with a portion going toward principal repayment and the remainder covering the accrued interest. Since the loan balance decreases at a rate slower than that in plan 2 due to the equal end-of-year payments, the interest decreases, but at a slower rate. End Of Year Interest Owed For Year Total Owed At End-Of-Year End-Of-Year Payment Total Owed After Payment TABLE 1-1

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 20P

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