Accounting cash flow question?

Question

Mr Celtic’s bank has agreed to grant him a loan of £10,000 from 1st January 2001. Interest will be charged at 10% per annum, and charged to his bank account at the end of each quarter, i.e. at the end of March, June, September and December.

The loan will mature in five years time (if that means anything)

Is the interest calculated at the fixed rate i.e. £250 every quarter

or

is it 10% of £10,000 one year, then 10% of £11,000 the following year and so on

Answer 1

Well, it depends on whether they're asking for compounded or simple interest?

Answer 2

Yes the interest will be £250 per quarter for the next 5 years, this is assuming he is paying no capital back to the bank.

At the end of year 1, he has already paid the £1000 interest, so going in to year 2 he still owes £10000 so the interest of 10% will again be £1000, therefore £250 over the next four quarters and so on.....

At loan maturity he will still owe the bank £10,000.

Answer 3

Total interest charged per annum will be £10000 * 10/100 = £1000. Which will be distributed equally in 4 quarters, £1000 / 4 = £250

So yes, interest will be charged £250 every three months