Average debt balance calculation

Question

The opening balance Of company A is 25,000, and the repayment is scheduled for 1000 per month at an annual interest rate of 5%. Use the average debt balance to calculate the interest payment.

the closing balance of debt at the end of the month is___ and the interest payment is___ ?

Answer 1

Closing Balance: $24,000

Interest Payment: $102.08

The closing balance is equivalent to the opening balance of $25,000 less the $1,000 monthly repayment amount.

The interest payment requires us to determine the average debt balance. The average debt balance is the (beginning balance of $25,000 the ending balance of $24,000) divided by two. Once we have calculated the average debt balance of $24,500 we must now determine the interest payment.

We determine the interest payment by multiplying the average debt balance by the annual interest rate of 5% and then dividing that figure by 12 for the number of months in a year.