Answer:
Interest paid in the first year = $420
Explanation:
This the an example of a loan amortization. A loan amortization is a method of loan repayment where a series of equal amount (instalment) is paid by the borrower to offset both the loan principal amount and the accrued interest over the loan period.
The interest paid in a year :
This is calculated as interest rate × loan balance at the beginning of the year
For Aunty Tilly, Interest paid in the first year will be:
= 12% × 3500
= $420
Equal Installment
The equal installment is calculaed as follows:
Equal amount = Loan Amount/ annuity factor
Annuity factor = (1 - (1 +r)^(-n))/ r
r- number of period, r- interest rate
Annuity factor = 1 - (1+0.12)^(-4)/0.12)
= 3.0373
in this question, the equal installment:
= 3500/3.0373
=$ 1152.32 (the question did not ask for this anyway)
