I thought I knew how to do this, but I'm finding myself in error.
Dave has a student loan of $10 000 on January 1, 2000. The loan has an interest rate of 9% per annum, compounded monthly. Instead of paying off the loan, Dave places a bundle of money in his sock drawer. He puts away an equal amount of money each month. Over the next 5 years, Dave receives several notices from the bank, demanding that he make his payments, but he ignores them. After 5 years, Dave removes all the money from his sock drawer and pays off the entire loan in one massive payment before the bank hauls him off to jail.
a) The bank recommends that Dave pay the bank $207.59 a month to pay off the loan in 5 years. How much money does Dave lose each month by adopting his sock drawer plan?
b) If the bank compounds the interest every two months instead of every month, how much money must Dave pay?
I realize this isn't part of the question, but I wanted to see how much he would owe in total at the end of 5 years.
A = P(1 + i)^n
A=final amount (?)
P=initial principal (10 000)
i=interest rate per month (0.09/12 = 0.0075)
n=# of compounding periods (5 years times 12 months = 60)
A=10 000(1+0.0075)^60
=$15656.81027
Does this look right?
Dave has a student loan of $10 000 on January 1, 2000. The loan has an interest rate of 9% per annum, compounded monthly. Instead of paying off the loan, Dave places a bundle of money in his sock drawer. He puts away an equal amount of money each month. Over the next 5 years, Dave receives several notices from the bank, demanding that he make his payments, but he ignores them. After 5 years, Dave removes all the money from his sock drawer and pays off the entire loan in one massive payment before the bank hauls him off to jail.
a) The bank recommends that Dave pay the bank $207.59 a month to pay off the loan in 5 years. How much money does Dave lose each month by adopting his sock drawer plan?
b) If the bank compounds the interest every two months instead of every month, how much money must Dave pay?
I realize this isn't part of the question, but I wanted to see how much he would owe in total at the end of 5 years.
A = P(1 + i)^n
A=final amount (?)
P=initial principal (10 000)
i=interest rate per month (0.09/12 = 0.0075)
n=# of compounding periods (5 years times 12 months = 60)
A=10 000(1+0.0075)^60
=$15656.81027
Does this look right?