Suppose that a customer takes out an amortized loan of size L which has an annual effective interest rate of 8%. The loan has a term of 10 years with ten equal size annual payments of size K made at the end of each year starting one year after the loan is issued. If the loan was instead repaid (over the same period of time) using the sinking-fund method where the sinking-fund gains an annual effective interest rate of 6%, then the total annual outlay (interest payment on the loan plus deposit into the sinking fund) would be 1200. Find the value of K. Give your answer rounded to two decimal places (i.e. X.XX).
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The annual interest payment on the loan can be calculated using the formula for the annual payment on an amortized loan: \[ K = L \times \frac{r(1+r)^n}{(1+r)^n - 1} \] where: - L = size of the loan - r = annual interest rate - n = number of payments Plugging in Show more…
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