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my question is about 3.2.13 which is A loan of amount L is to be repaid...

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my question is about 3.2.13 which is

A loan of amount L is to be repaid by n payments, starting oneperiod after the loan is made, with interest at rate I per period.Two repayment schemes are considered:

i) level payments for the lifetime of the loan;

ii) each payment consists of principal repaid of L/n plusinterest on the previous outstanding balance.

Find the total interest repaid under each scheme and showalgebraically that the interest paid under scheme (i) is largerthan that paid under scheme (ii).

Show that for each t = 1, 2, . . . , n − 1, OBt is larger underscheme (i) than under scheme (ii).

Verify algebraically that L is the present value at the time ofthe loan, at rate of interest i per payment period, of all paymentsmade under scheme (ii).

Answer & Explanation Solved by verified expert
3.8 Ratings (570 Votes)
solution Lets L Loan amount be 1000000 and i rate of interest be 10 per annum and N no of periods be 5 years NOW there are two ways in which the repayment loan can be done i level payments Equal for the lifetime of the loan or ii Each payment which consists of equal principal payments and interest on the outstanding balance Case I level payments the amount of equal payments is given by A L sum of annuity factors where A annual level payments L Loan amount NOW sum of annuity    See Answer
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