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ECONOMIC EQUIVALENCE FOR FOUR REPAYMENT PLANS OF AN $8,000 LOAN

ECONOMIC EQUIVALENCE FOR FOUR REPAYMENT PLANS OF AN $8,000 LOAN. Plan #1: $2,000 of loan principal plus 10% of BOY principal paid at the end of year; interest paid at the end of each year is reduced by $200 (i.e., 10% of remaining principal)

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ECONOMIC EQUIVALENCE FOR FOUR REPAYMENT PLANS OF AN $8,000 LOAN

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  1. ECONOMIC EQUIVALENCE FOR FOUR REPAYMENT PLANS OF AN $8,000 LOAN • Plan #1: $2,000 of loan principal plus 10% of BOY principal paid at the end of year; interest paid at the end of each year is reduced by $200 (i.e., 10% of remaining principal) Year Amount Owed Interest Accrued Total Principal Total end at beginning for Year Money Payment of Year of Year owed at Payment ( BOY ) end of Year 1 $8,000 $800 $8,800 $2,000 $2,800 2 $6,000 $600 $6,600 $2,000 $2,600 3 $4,000 $400 $4,400 $2,000 $2,400 4 $2,000 $200 $2,200 $2,000 $2,200 Total interest paid ($2,000) is 10% of total dollar-years ($20,000)

  2. ECONOMIC EQUIVALENCE FOR FOUR REPAYMENT PLANS OF AN $8,000 LOAN • Plan #2: $0 of loan principal paid until end of fourth year; $800 interest paid at the end of each year Year Amount Owed Interest Accrued Total Principal Total end at beginning for Year Money Payment of Year of Year owed at Payment ( BOY ) end of Year 1 $8,000 $800 $8,800 $0 $800 2 $8,000 $800 $8,800 $0 $800 3 $8,000 $800 $8,800 $0 $800 4 $8,000 $800 $8,800 $8,000 $8,800 Total interest paid ($3,200) is 10% of total dollar-years ($32,000)

  3. ECONOMIC EQUIVALENCE FOR FOUR REPAYMENT PLANS OF AN $8,000 LOAN • Plan #3: $2,524 paid at the end of each year; interest paid at the end of each year is 10% of amount owed at the beginning of the year. Year Amount Owed Interest Accrued Total Principal Total end at beginning for Year Money Payment of Year of Year owed at Payment ( BOY ) end of Year 1 $8,000 $800 $8,800 $1,724 $2,524 2 $6,276 $628 $6,904 $1,896 $2,524 3 $4,380 $438 $4,818 $2,086 $2,524 4 $2,294 $230 $2,524 $2,294 $2,524 Total interest paid ($2,096) is 10% of total dollar-years ($20,950)

  4. ECONOMIC EQUIVALENCE FOR FOUR REPAYMENT PLANS OF AN $8,000 LOAN • Plan #4: No interest and no principal paid for first three years. At the end of the fourth year, the original principal plus (compounded) interest is paid. Year Amount Owed Interest Accrued Total Principal Total end at beginning for Year Money Payment of Year of Year owed at Payment ( BOY ) end of Year 1 $8,000 $800 $8,800 $0 $0 2 $8,800 $880 $9,680 $0 $0 3 $9,680 $968 $10,648 $0 $0 4 $10,648 $1,065 $11,713 $8,000 $11,713 Total interest paid ($3,713) is 10% of total dollar-years ($37,128)

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