"A borrower obtained a $10,000 term loan with 6 1/2% interest paid yearly. A $1,000 principal reduction was to be paid with each yearly installment. What would be the amount of the principal and interest payment for the second year?

$1585

Explanation:

Interest for the first year = 6.5% of principal due at the beginning of the year

= 6.5% of $10,000

= $ 650

Principal repayment at the end of the year = $1000

Principal due at the beginning of the second year = $10,000 - $1000= $9000

Interest payable at the end of the second year = 6.5% of principal outstanding at the beginning of the second year = 6.5% of 9000

                                                                            = $ 585

Principal repayment at the end of the second year = $1000

Hence total payment at the end of the second year = $1000 + $585= $1585

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