Question

A loan of $100,000 is taken out which requires an annual interest payment of 6% of the borrowed amount of money (in market dollars). No principal payments are made, only interest is paid. Inflation is 3.1% per year. what will be the value of interest payment at the end of fifth year in real dollars?A. $5,930 B. $6,000 C. $5,150. D. $6.989

Answer 1

Answer:

C. $5,150

Explanation:

Calculation for what will be the value of interest payment at the end of fifth year in real dollars

First step is to calculate the Interest amount per year

Interest amount per year = 100,000*6%

Interest amount per year = $6,000

Now let calculate the value of interest payment at the end of fifth year in real dollars

Value of interest payment in 5th year in real dollars = 6,000/(1+3.1%)^5

Value of interest payment in 5th year in real dollars= 6,000/1.164913

Value of interest payment in 5th year in real dollars= $5,150

Therefore the Value of interest payment in 5th year in real dollars will be $5,150