$50,000 per year?

Quantitative Finance Level 2

Suppose you borrow $1,000,000 on a loan with an APR of 5%.

After three years, how much will you owe on your loan (assuming you don't pay any of it off during those three years)?

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1 solution

Geoff Pilling
Jan 19, 2017

Each year your loan goes up by $5\%$ .

Let $L_n =$ your loan amount after $n$ years.

So, after the first year, your loan amount is:

$L_1 = \$1000000 \times 1.05 = \$1050000$

After 2 years:

$L_2 = L_1 \times 1.05 = \$1102500$

After 3 years:

$L_3 = L_2 \times 1.05 = \$\boxed{1157625}$