Example 2.4 Consider a loan of $1,000 to be paid back in 5 equal instalments due at yearly intervals. The instalments include both the interest payable each year calculated at 15% of the current outstanding balance and the repayment of a fraction of the loan. A loan of this type is called an amortised loan. The amount of each instalment can be computed as 1,000 298.32. PA(15%,5) This is because the loan is equivalent to an annuity from the point of view of the lender. Exercise 2.13 What is the amount of interest included in each instalment? How much of the loan is repaid as part of each instalment? What is the outstanding balance of the loan after each instalment is paid? Exercise 2.14 How much can you borrow if the interest rate is 18%, you can afford to pay $10,000 at the end of each year, and you want to clear the loan in 10 years? Exercise 2.15 Suppose that you deposit $1,200 at the end of each year for 40 years, subject to annual compounding at a constant rate of 5%. Find the bal- ance after 40 years