Construct a cash flow diagram illustrating the cash flows involved in the following transaction from the bank’s viewpoint. The amount loaned is $6000 at 4% compound interest for ten years. Be sure to label all amounts including the final repayment. The borrower repays the loan with the following schedule:

(a) Lump sum repayment at the end of year 10 of the principal plus accrued interest.

(b) Year-end payments of equal installments as in a standard installment loan contract.

Determine the total interest given to the bank under each scenario. Show all cash flow diagrams and calculations for each scenario and label all cash flows.

2. 620 only: Referring to the problem above, determine a new payment schedule (for the account earning 4% compound interest) that would result in the same amount of interest paid as an account earning 4% simple interest scenario with no payments made until the end of the loan.

Answer rating: 100% (QA)

a Loan amount 6000 Interest rate 4 Compounded annuity fact... View the full answer