A loan of 1000 is taken out at an annual effective interest rate of 5%. The loan

Question

A loan of 1000 is taken out at an annual effective interest rate of 5%. The loan will be repaid using the Sinking Fund Method. That is, level annual interest payments are made at the end of each year for 10 years, and the principal amount for the loan is repaid at the end of 10 years by making equal size payments into the fund at the end of each year for 10 years. If the sinking fund earns an annual effective interest rate of 4%, then find the difference between the interest payment on the loan and the interest earned by the sinking fund in the fifth year. Round your answer to the nearest whole number.

Explanation / Answer

Year interest paid investment Interest Yearly contribution balance difference in interest paid and received in Year 4 Year interest paid investment Interest Yearly contribution balance difference in interest paid and received in Year 4 1 50 100 0 100 100 50 2 50 100 4 104 204 46 3 50 100 8.16 108.16 312.16 41.84 4 50 100 12.4864 112.4864 424.6464 37.5136 5 50 100 16.98586 116.9859 541.6323 33.01414 Answer is 33.01

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