Question

How much can Wells Fargo lend to a developer who will repay the loan by

selling 6 view lots at $190,000 each 2 years from now? Assume the bank will lend at a

nominal 14% per year, compounded semiannually

Answer 1

It has been stated that developer wil sell the 6 lots at $190,000 each two years from now.

So,

Future value = $190,000 * 6 = $1,140,000

Interest rate = 14% per year compounded semi-annually

Since, interest rate is compounded semi-annually, we have to divide the interest rate by 2.

Adjusted interest rate (i) = 14/2 = 7%

Time period = 2 years

As interest rate is compounded semi-annually, we have to multiply the time period by 2.

Adjusted time period (n) = 2 * 2 = 4 years

The loan that bank can lend to developer will be equal to the present value of total amount for which the view lots are sold.

Calculate the Present Value -

PV = $1,140,000(P/F, 7%, 4)

PV = $1,140,000 * 0.7629

PV = $869,706

The bank will lend $869,706 to the developer.