Question

Suppose someone takes out a home improvement loan for $30000. The annual interest on the loan is 6% and is compounded monthly. The monthly payment is $600. Let a denote the amount owed at the end of the nth month. The payments start in the first month and are due the last day of every month - this means in a given month interest is added first, and then the payment is applied to the resulting loan Balance. (a) Give a recursive definition for a,. including the recurrence relation and the base case. (You can readily check your thinking by setting up a spreadsheet to track the loan balance.) (b) Suppose that the borrower would like a lower monthly payment. How large does the monthly payment need to be to ensure that the amount owed decreases every month?

Answer 1

Answer:

(a)f(n) = f(n-1)*1.005 - 600

(b) 150 USD

Step-by-step explanation:

Since the annual interest is 6% and interest is compounded everymonth and added at the beginning of the month. The the monthly interest is 6 / 12 = 0.5%

(a)From there we can give a recursive definition for the dept owned at nth month

f(n) = f(n-1) + f(n-1)*0.005 - 600 = f(n-1)*1.005 - 600

where f(0) = 30000

(b) For the amount owed to decrease everymonth, the monthly payment must be larger than the interest added at every month

that is payment > f(n-1)*0.005

payment > 30000 * 0.005

payment > 150 USD

So the monthly payment needs to be at least 150 USD for the dept to decrease.