A 10-year loan of 10,000 may be repaid under the following two methods:

i) amortization method with equal annual payments at an annual effective rate of 5%.

ii) sinking fund method in which the lender receives an annual effective rate of 6% and the sinking fund earns an annual effective rate of j.

Both methods require a payment of X to be made at the end of each year for 10 years. Calculate j

Answers:

j<=6.5%

10.0%

8.0%

j>12.0%

6.5%