Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

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Multiple Choice

If John makes an extra payment of $15 each month on a loan with a 6% annual interest rate compounded monthly, how much total interest will he save over the life of a 5-year $5,000 loan compared to making only the minimum payments?

$240

$270

$300

$260

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Verified step by step guidance

Understand the problem: John is making an extra payment of $15 each month on a loan with a 6% annual interest rate compounded monthly. We need to calculate how much total interest he will save over the life of the loan compared to making only the minimum payments.

Step 1: Calculate the monthly interest rate by dividing the annual interest rate by 12. Use the formula: $ r = \frac{6\%}{12} $, where $ r $ is the monthly interest rate.

Step 2: Determine the minimum monthly payment for the loan using the loan amortization formula: $ M = P \cdot \frac{r(1 + r)^n}{(1 + r)^n - 1} $, where $ M $ is the monthly payment, $ P $ is the loan principal ($5,000), $ r $ is the monthly interest rate, and $ n $ is the total number of payments (5 years × 12 months = 60 payments).

Step 3: Calculate the total interest paid over the life of the loan with only the minimum payments. Subtract the loan principal from the total of all payments made: $ \, \text{Total Interest} = (M \cdot n) - P \, $.

Step 4: Recalculate the monthly payment and total interest paid when John makes an extra $15 payment each month. Add $15 to the minimum monthly payment and repeat the calculations for total interest paid. Finally, subtract the total interest paid with extra payments from the total interest paid with minimum payments to find the interest saved.