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Answer:
Cindy borrows $13.500 for twelve years at an annual effective interest rate of i. She accumulates the amount necessary to repay the loan by a sinking fund. Cindy makes a payment of P at the end of each of the twelve years of the loan period; each includes payment on the loan at an annual effective interest rate of i and payment into a sinking fund on which the annual effective interest rate is 4%. If the annual effective rate on the loan had been 2i instead of i, Cindy's total annual payment would have been 1.2 P. Find the amount P.
Explanation:
As Cindy borrowers $13, 500 for 12 years, at an interest rate of i% she takes in the amount needed to repay the loan of the sinking fund.
- A sinking fund is a fund that consists of money that is saved to pay off the debt off in the future. It seeks to soften the large outlays of money.
- Cindy makes P as payment at end of each 12 years. If the annual effective interest rate is 4% then the effective loan rate on the loan would have been 2i.
- Thus Cindy's total average payment would be equal to 1.2P hence the amount is 500.
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