Kellison 6.4 #25

The question reads: "A borrows $12,000 for 10 years and agrees to make semiannual payments of $1000. The lender receives 12% convertible semiannually on the investment each year for the first 5 years and 10% convertible semiannually for the second 5 years. The balance of each payment is invested in a sinking fund earning 8% convertible semiannually. Find the amount by which the sinking fund is short of repaying the loan at the end of the 10 years. Answer to the nearest dollar." The answer is.. $2221. I do not understand this problem at all, why does the question say that the borrower is making semiannual payments if he is investing in a sinking fund... doesn't that defeat the whole purpose of making a sinking fund in the first place? I am also having trouble distinguishing between a lot of the terminology... payment, principle, balance, etc. Any help is appreciated.

The question reads: "A borrows $12,000 for 10 years and agrees to make semiannual payments of $1000. The lender receives 12% convertible semiannually on the investment each year for the first 5 years and 10% convertible semiannually for the second 5 years. The balance of each payment is invested in a sinking fund earning 8% convertible semiannually. Find the amount by which the sinking fund is short of repaying the loan at the end of the 10 years. Answer to the nearest dollar." The answer is.. $2221. I do not understand this problem at all, why does the question say that the borrower is making semiannual payments if he is investing in a sinking fund... doesn't that defeat the whole purpose of making a sinking fund in the first place? I am also having trouble distinguishing between a lot of the terminology... payment, principle, balance, etc. Any help is appreciated.

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