and promise to pay him the $25,000 down payment in 2 years with 1.25% simple interest. You decide to pay off the down payment early, in one year. What amount will settle the debt if money can earn 0.75%?
To calculate the amount required to settle the debt early, we need to calculate the total amount due, including the interest.
First, let's calculate the interest on the $25,000 down payment over two years with a 1.25% simple interest rate. The formula for calculating simple interest is:
Interest = Principal * Rate * Time
In this case:
Principal = $25,000
Rate = 1.25% = 0.0125 (decimal form)
Time = 2 years
Interest = $25,000 * 0.0125 * 2
Interest = $625
So, the interest on the $25,000 down payment over two years is $625.
Now, let's calculate the total amount due after the one-year early payment. To do this, we need to subtract the interest the borrower would have earned from the original amount.
The interest earned can be calculated using the same formula, with a 0.75% interest rate (0.0075 in decimal form) and a time of one year:
Interest earned = Principal * Rate * Time
Interest earned = $25,000 * 0.0075 * 1
Interest earned = $187.50
Now, subtract the interest earned from the total amount due after two years:
Total amount due = Original amount + Interest - Interest earned
Total amount due = $25,000 + $625 - $187.50
Total amount due = $25,437.50
Therefore, to settle the debt early and pay off the $25,000 down payment in one year with a 0.75% interest rate, you would need to pay $25,437.50.