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24 July, 02:39

Mary wants to take out a loan. Suppose she can afford to make monthly payments of 100 dollars and the bank charges interest at an annual rate of 6 percent, compounded monthly. What is the maximum amount that Mary could afford to borrow if the loan is to be paid off eventually?

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  1. 24 July, 06:14
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    To be paid eventually it can borrow until 20,000 dollars.

    Explanation:

    We will calculate the present value of a 100 dollars monthly payment discounted at 6% annual rate compounded monthly.

    the monthly rate will be the annual rate divided by 12 months within a year:

    6% / 12 = 0.5% = 0.005

    A perpetuity will be a payment wich only cover the interest:

    100 / 0.005 = 20,000
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