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You borrow £10,000 from a friend and agree that you will repay the loan by four equal end-of-year instalments. Your friend will charge you a constant annual interest rate of 8%. What will be your annual repayments?

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You borrow £10,000 from a friend and agree that you will repay the loan by four equal end-of-year instalments. Your friend will charge you a constant annual interest rate of 8%. What will be your annual repayments?

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VanessaVeteran · Tutor for 11 years

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<p>The amount to be repaid annually can be calculated using the formula for PV of ordinary annuity which is as follows-&nbsp;<br>PV = PMT/R x (1-1/(1+R)^N)......(1)<br>Where&nbsp;<br>PMT is the periodic payment&nbsp;<br>R is the interest rate<br>N is the number of payments.&nbsp;<br>Rearranging equation 1 and isolating PMT&nbsp;<br>PMT = PV x R/(1-1/(1+R)^N)<br>In the given scenario&nbsp;<br>PV = £10,000<br>R = 8%<br>N = 4&nbsp;<br>Substituting values in equation 2&nbsp;<br>PMT = &nbsp;£10,000 x 8%/(1-1/(1+8%)^4)<br>= £800/(1-1/(1.08)^4)<br>= £800/(1-1/(1.360489)<br>= £800/(1- 0.735030)<br>= £800/0.264970<br>= £3,019.20<br>Thus, the annual repayment amount is £3,019.20.</p>
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