Question

You borrowed $1000, $1200, and $1500 from a bank (at 8% p.a. effective interest rate) at...

You borrowed $1000, $1200, and $1500 from a bank (at 8% p.a. effective interest rate) at the end of years 1, 2, and 3, respectively. At the end of year 5, you made a payment of $2000, and at the end of year 7, you pay off the loan in full. Draw the CFD for this exchange from your point of view and what is your payment at EOY 7?

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Homework Answers

Answer #1

The present value of the loan and payment must be equal. Let the payment EoY 7 be A.

The present value of loan is

P = $ 3,145.48

Similarly the payment at the end of year 5 and 7 must be converted to today's dollar

P = 1,361.17 + 0.58349A

Now, equate these two values

3145.48 = 1361.17 + 0.58349A

0.58349A = 3145.48 - 1361.17

0.58349A = 1784.31

A = $ 3,058

In the cash flow diagram the amount on the downward direction is the amount of loan borrowed while on the upward direction it shows the payments.

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