Question

The interest amount to be paid at the end of second year for a loan amount of Rs 10000 taken for 6 years @ 12% p.a following partial/balloon repayment plan (wherein Rs 1000 to be paid every year and remaining Rs 5000 in the last sixth year) would be:

• A. Rs 1200
• B. Rs 960
• C. Rs 1080
• D. Rs 1000

Hint:

Remember that interest is always calculated on the remaining outstanding principal balance at the beginning of the year, not on the original loan amount.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
In a partial or balloon repayment plan, the borrower pays a small, fixed principal amount each year, and the interest is calculated annually based on the outstanding principal balance remaining at the start of that year.

Step 2: Detailed Explanation:
Let us track the loan balance step-by-step:
1. Initial Loan Amount (Principal) $= \text{Rs } 10,000$.
2. First Year (Year 1):
- Outstanding principal at the start of Year 1 $= \text{Rs } 10,000$.
- Interest is paid, and a principal repayment of $\text{Rs } 1,000$ is made at the end of Year 1.
3. Second Year (Year 2):
- Outstanding principal at the start of Year 2 $= 10,000 - 1,000 = \text{Rs } 9,000$.
- The interest rate is $12\%$ per annum.
- The interest to be paid at the end of Year 2 is calculated on this outstanding balance of Rs 9,000:
\[ \text{Interest for Year 2} = 9,000 \times \frac{12}{100} = \text{Rs } 1,080 \]

Step 3: Final Answer:
The interest to be paid at the end of the second year is Rs 1,080, matching Option (C).