Section: Arithmetic Reasoning

20) Jane takes out a loan for $100,000.00 over 10 years and agrees to pay interest only at an annual rate of 8%. What will her monthly payment be?

1. $333.33
2. $666.67
3. $1,000
4. $8,000

This question is asking you to only determine the monthly payment of an interest only loan. Thus, you do not need to concern yourself with the 10 year term or the principal being repaid as that is irrelevant.

The only numbers you need to work with are the principal amount, the interest rate and the number of months in a year. The formula for calculating an interest only loan would be (Principal * Annual Rate) / Number of months in a year. Therefore:

($100,000 * .08)/12 = $666.66666 or $666.67

A payment of $666.67 per month would result in payments of $8000.04 per year which is 8% of $100,000.00.