Question: A 12-year loan of 8000 is to be repaid with payments to the lender of 800 at the end of each year and deposits of X at the end of each year into a sinking fund. Interest on the loan is charged at an 8% annual effective rate.The sinking fund annual effective rate is 4%. Calculate X. [FM 11/00 #38]
The answer is X = 330.34. I got it. Then I tried to use a different way to do it. Because i=8%, the annual interest is 800*0.08=640, leaving 160 to amortize the loan, which is 2% of 8000. After 12 payment, the remaining balance should be 8000*(1-0.02)^12=6277.73. This is the amount the sinking fund is supposed to accumulate to. This leads to a wrong answer 417.80.
What's wrong with this approach? Thanks,
The answer is X = 330.34. I got it. Then I tried to use a different way to do it. Because i=8%, the annual interest is 800*0.08=640, leaving 160 to amortize the loan, which is 2% of 8000. After 12 payment, the remaining balance should be 8000*(1-0.02)^12=6277.73. This is the amount the sinking fund is supposed to accumulate to. This leads to a wrong answer 417.80.
What's wrong with this approach? Thanks,
Simple FM question. Where am I wrong?
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