Question

You have the chance to buy a promissory nite in which you receive 45 monthly payments of $200 (starting a month from now), followed by 140 monthly payments of $250. If you want to earn 10% compounded monthly, what price should you pay for the note?

Answer 1

Solution:

Total monthly payments = 45 + 140 = 185 monthly payments

Amount of first 45 payments = $200

Amount of next 140 payment = $250

Desired return (i) = 10% per annum, 0.83333% monthly rate

Price to be paid for note = Present value of future payments discounted at desired rate of return

= ($200 * Cumulative PV factor at 0.83333% for 45 periods) + ($250 * Cumulative PV factor at 0.83333% for 46 th to 185th periods)

= ($200 *37.39703) + ($250 * 56.75549)

= $21,668.28