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Bob borrowed $10,000 at an effective annual rate of interest of 7%. Bob’s plan was to repay the loan with equal principal repayments plus interest at the end of each year for 20 years. After the 10th payment, Bob decides to change his payment scheme and pay the outstanding balance with equal annual payments. The loan will still be repaid in 20 years. Calculate the difference between the 10th and 11th payment.

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Answer:

$172.75

Explanation:

Principal amount for the first ten years=$500

($10,000/20)

Interest repayment during the 10th Year=$385

(10,000-(500*9)*7%)

Total payment for Year 10=$885

(500+385)    

Total principal amount at Year 10=$5,000

(10,000-(500*10)

Present value of Annuity=Payment per year((1-(1+7%)^-10)/7%)

5,000=Payment per year(7.02)

Payment per year from year 11=712.25

Difference between 10th and 11th payment=$172.75

(885-712.25)

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