Dear Julio,
I have a question about exercise 3 of today's lesson:
Specifically, the first problem, "The company pays off the entire loan balance plus interest in two years." I don't really understand your calculation.
Shouldn't we calculate the interest payment in two years by calculating: 250*0.08*1.08 + 250*0.08*1.08^2, which would give ~44.9? Instead, we calculate 250×(1.08)^2 - 250 (which is the same as 250*0.08 + 250*0.08*1.08?), which is 41.6.
Could you maybe briefly explain the calculation?
Best, Alois
Dear Alois,
We start with a debt of 250
At the end of the year, we owe the same debt plus interest (250 + 0.08*250 = 1.08*250)
At the beginning of the second year, we owe 1.08*250
At the end of the second year, we need to pay interest on that debt: hence, the total debt payment is 250*1.08^2
If 250 is the principal, the remaining amount has to be interest.