Thread: Valuation Mathematics

Hi

New on here and hoping for some valuation help!

Have an exam tomorrow and one of the questions is:

The rate of interest charged by a bank for a loan for repairs to a property is 6%. The
amount borrowed is £3,500 and the loan is to be repaid in 4 each annual instalments.
How much is each instalment?
(a) £1,010 (b) £2,020 (c) £1,111 (d) £2,222 (e) £1, 212


Now I think I do this with a Annual Sinking Fund but am not sure. Would anyone be kind enough to walk me through an answer?

Thanks

Originally Posted by Reidy7

Hi

New on here and hoping for some valuation help!

Have an exam tomorrow and one of the questions is:

The rate of interest charged by a bank for a loan for repairs to a property is 6%. The
amount borrowed is £3,500 and the loan is to be repaid in 4 each annual instalments.
How much is each instalment?
(a) £1,010 (b) £2,020 (c) £1,111 (d) £2,222 (e) £1, 212


Now I think I do this with a Annual Sinking Fund but am not sure. Would anyone be kind enough to walk me through an answer?

Thanks

Because this is a multiple choice you do not need to do anything cleverer that eliminate the impossible.

If you pay interest on the principle every year rather than on the remaining un-repaid part you would pay altogether £3500+4*3500*0.06=£4340. Hence four annual payments of £1085 is more than enough to repay the loan in four equal annual payments. Hence if any of the options are correct it must be (a).

CB