Question

Claudius took out an unsubsidized Stafford loan at the beginning of his six-year college career. The loan had a principal of $4,850, an interest rate of 6. 5% compounded monthly, and a duration of ten years. If Claudius started paying off the loan when he graduated, what is his monthly payment? Round all dollar values to the nearest cent. A. $71. 37 b. $81. 25 c. $55. 07 d. $76. 55.

Answer 1

The amount of monthly payment by Claudius is $55.07.

Computation:

Given,

Principal amount =$4,850

Interest rate= 6.5%

The interest rate to be used in the computation will be the effective interest rate, as the interest is compounded monthly.

$\begin{aligned}\text{Effective Interest Rate}&=\dfrac{\text{Interest Rate}}{12}\\&=\dfrac{6.50\%}{12}\\&=0.54\%\end{aligned}$

Time period =10 years, while the effective time period for compounding interest amount monthly is 120 years.

The computation of the per month payment will be determined with the help of the excel formula of PMT or by using an online financial calculator under which the components will be termed as:

I/Y =0.54%

N =120

PV =-$4,850

FV =$0

The computation is shown in the image attached below.

Therefore, the monthly payment is $55.02

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