Skip to content

IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Practical applications of the equation of value (loans and APR)

A loan of ₹4,00,000 carries interest at 12% p.a. nominal, convertible monthly. It is repaid by monthly instalments of ₹20,000 paid at the end of each month. How much of the second instalment is capital repayment?

The capital repaid in the second instalment is ₹16,160. The monthly rate is 1%. After the first instalment the balance is ₹3,84,000, so month-2 interest is ₹3,840, and the rest of the ₹20,000 reduces the loan.

  1. A₹3,840.00
  2. B₹4,000.00
  3. C₹16,000.00
  4. D₹16,160.00Correct
  5. ₹20,000.00

Explanation

The monthly rate is 12%/12 = 1%. Interest in month 1 is 4,000, so capital repaid is 16,000 and the balance becomes 3,84,000. Interest in month 2 is 1% × 3,84,000 = 3,840, so capital in the second instalment is 20,000 − 3,840 = 16,160. The figure ₹16,000 is the capital in the first instalment.

Did you get it right without looking?

One question tells you little. A timed set on Practical applications of the equation of value (loans and APR) shows your real accuracy, how long you take and where you lose marks.

Practise Practical applications of the equation of value (loans and APR)Free diagnostic mock

More Practical applications of the equation of value (loans and APR) questions