Question

Edgar has taken out a $6,250 unsubsidized Stafford loan to fund his four-year undergraduate degree. The loan has a duration of 10 years and an interest rate of 6.1%, compounded monthly. How much interest capitalization will have accrued by the time Edgar graduates? Round all dollar values to the nearest cent.
a.
$1,670.30
b.
$1,722.22
c.
$664.35
d.
$1,524.96

Answer 1

Interest accrued = P[(1 + r/12)^(12*years) − 1].

Here P = 6250, r = 0.061, years = 4, so monthly rate = 0.061/12 = 0.0050833333 and n = 48.

Interest = 6250[(1.0050833333)^48 − 1] ≈ 6250(1.2755554 − 1) ≈ 6250(0.2755554) ≈ $1,722.22.

Answer: (b) $1,722.22.