In 3 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 calculates the total value of a series of equal payments made at regular intervals, which can be applied to determine the monthly payments required to repay a loan by considering the loan's interest rate and duration. By rearranging the formula, you can isolate the monthly payment as a function of the principal amount, interest rate, and number of payments. This allows borrowers to understand how much they need to pay monthly in order to reach the desired future value of the loan (i.e., paying it off by the end of the term).