Question

A loan of $300,000 is taken out which requires an annual interest payment of 4.6% of the borrowed amount of money (in market dollars). No principal payments are made, only interest is paid. Inflation is 2% per year. What will be the value of interest payment at the end of fourth year in real dollars

Answer 1

Answer:

$13,800

Explanation:

Loan Payment  = $300,000

Annual Interest rate includes the real interest and inflation effect in it. As 2% is already included in the calculation of 4.6% so, we will charge 4.6% to the principal amount.

Interest Payment = $300,000 x 4.6% = $13,800

As the payment is made each year, so there is no compounding effect to the interest payment and Interest payment will remain constant every year. The value of Interest payment at the end of fourth year is $13,800.