Question

Suppose that Jim plans to borrow money for an education at Texas A&M University. Jim will need to borrow $20,000 at the end of each year for the next five years (total=$100,000). Jim wishes his parents could pay for his education but they can’t. At least, he qualifies for government loans with a reduced interest rate while he is in school. He has a special arrangement with AggieBank to lend him the money at a subsidized rate of 2% over five years without having to make a payment until the end of the fifth year. However, at the end of the fifth year, Jim agrees to pay off the loan by borrowing from Longhorn Bank. Longhorn Bank will lend him the money he needs at an annual interest rate of 8%. Jim agrees to pay back the Longhorn Bank with 15 annual payments and the payments will be uniform (equal annual payments including principal and interest).

(i) Calculate how much money Jim has to borrow at the end of 5 years to pay off the loan with AggieBank.

a. $94,269

b. $104,081

c. $100,000

d. $117,332

e. None of the above

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(ii)   Calculate the annual payment Jim must pay to the Longhorn Bank if the first payment is due at the end of the sixth year (one-year after borrowing the money from Longhorn Bank).  

a.            $11,013

b.            $11,683

c.             $12,160

d.            $13,708

e. None of the above

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(iii)          Calculate the total interest Jim must pay because of borrowing money to attend TAMU.

a.            $82,396

b.            $182,395

c.             $12,159

d.            $100,000

e. None of the above

ENTER RESPONSE HERE:

Answer 1

1. ans. Amount of money Jim has to borrow at the end of 5 years to pay off the loan with AggieBank - a. $​​​​94,269 .

2. ans. Amount of annual payment Jim must pay to the Longhorn Bank if the first payment is due at the end of the sixth year (one-year after borrowing the money from Longhorn Bank - b. $11,683 .

3. ans. The total interest that Jim must pay because of borrowing money to attend TAMU - c. $12,159 .