Question

Mary wants to take out a loan. Suppose she can afford to make monthly payments of 100 dollars and the bank charges interest at an annual rate of 6 percent, compounded monthly. What is the maximum amount that Mary could afford to borrow if the loan is to be paid off eventually?

Answer 1

Answer:

To be paid eventually it can borrow until 20,000 dollars.

Explanation:

We will calculate the present value of a 100 dollars monthly payment discounted at 6% annual rate compounded monthly.

the monthly rate will be the annual rate divided by 12 months within a year:

6% / 12 = 0.5% = 0.005

A perpetuity will be a payment wich only cover the interest :

100 / 0.005 = 20,000