Question A person has made an arrangement to borrow $1,000 now and another $1,000 two years hence. The entire obligation is to be repaid at the end of four years. If the projected interest rates in years one, two, three, and four are 10%, 12%, 12%, and 14%, respectively, how much will be repaid as a lumpsum amount at the end of four years ? :: Solution :: Step 1 Interest charged on the principal amount and the interest accrued is known as Compound Interest. It is also known as Interest on interest. It is calculated as: Amount = C(1+r)n Where C denotes the Principal Amount r denotes the rate of interest n denotes the number of periods Step 2 The following schedule can be made: Year Interest Rate Opening Balance Interest Closing Balance 1 10% 1000 100 1100 2 12% 1100 132 1232 3 12% 2232 267.84 2499.84 4 14% 2499.84 349.98 2849.82 $ 1,000 is borrowed at Year 1 and interest is accumulated till Year 2 In Year 3, $ 1,000 more is borrowed and interest is accumulated till Year 4. Thus, the total amount due to be paid is $ 2,849.82