Posted by Maame on Sunday, May 20, 2012 at 4:59pm.
Serena wants to borrow $15 000 and pay it back in 10 years. Interest rates are
high, so the bank makes her two offers:
• Option 1: Borrow the money at 10%/a compounded quarterly for
the full term.
• Option 2: Borrow the money at 12%/a compounded quarterly for 5 years
and then renegotiate the loan based on the new balance for the last 5 years.
If, in 5 years, the interest rate will be 6%/a compounded quarterly, how
much will Serena save by choosing the second option?
steps and formula to get answer will be nice, so i know how it works

Math  Henry, Monday, May 21, 2012 at 4:58pm
Option !:
P = Po(1+r)^n.
r = (10%/4) / 100% = 0.025 = Quarterly
% rate expressed as a decimal.
n = 4Comp./yr * 10yrs = 40 Compounding
periods.
P = 15000(1.025)^40 = $40,275.96
Int. = P  Po = 40275.96  15000 = 25,275.96.
Option 2:
P = 15000(1.03)^20 = $27,091.67
P = 27091.67(1.015)^20 = $36,488.55.
Int. = 36,488.55  15000 = $21,488.55.
Saved = 25,275.96  21,488.55 = $3787.41
NOTE: The procedure for calculating r is the same for both options.

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