In 3–5 sentences, explain how the future value of an annuity formula can be used to calculate the monthly payment of a loan.

Answer 1

The future value of an annuity formula, which determines the total value of a series of equal payments made at regular intervals, can be rearranged to calculate the monthly payment required for a loan. By knowing the total amount needed at the end of the loan term (the future value), the interest rate, and the number of payment periods, you can input these values into the formula to solve for the monthly payment amount. This allows borrowers to assess how much they need to pay monthly to reach their financial goals, such as paying off a mortgage or financing a large purchase. Thus, the formula becomes a valuable tool in financial planning and loan management.