Answered Essay: You have an outstanding student loan with required payments of $550 per month for the next four years. The interest rate on the loan is 10% APR. You ar

You have an outstanding student loan with required payments of $550 per month for the next four years. The interest rate on the loan is 10% APR. You are considering making an extra payment of $150 today​ (that is, you will pay an extra $150 that you are not required to​ pay).

a. If you are required to continue to make payments of $550 per month until the loan is paid​ off, what is the amount of your final​ payment?

b. What effective rate of return​ (expressed as an APR with monthly​ compounding) have you earned on the $150​?

Expert Answer

 

SOLUTION:

Interest rate 10.00%
Monthly payment 550.00
Years to pay 4
Current balance $21,685.49 PV(10%/12 , 4year*12, 550) * -1 = $21,685 .49
Extra payment 150.00
Current balance after extra payment 21,535.49 21,685.49 – 150 = 21,535.49
Money left over if last payment stays the same
$223.40 FV(10%/12, 4 *12,-550,21,535.49) = $223.40
Interest rate earned over the period
10.00% ((22.40/150)^(1/(4*12))-1)*12 = 9%
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