Question

A friend asks to borrow $49 from you and in return will pay you $52 in one year. If your bank is offering a 6.5% interest rate on deposits and loans:

A. How much would you have in one year if you deposited the $49 instead?

B. How much money could you borrow today if you pay the bank $52 in one year?

C. Should you loan the money to your friend or deposit it in the bank?

Answer #1

A. |
$ 52 |
|||||||

Working: | ||||||||

Future value of deposit in 1 year | = | Deposit amount now | * | Future Value of 1 | ||||

= | 49 | * | (1+0.065)^1 | |||||

= | 49 | * | 1.065 | |||||

= | 52 | |||||||

B. |
$ 49 |
|||||||

Working: | ||||||||

Present Value of money | = | Future Value of money | * | Present Value of 1 | ||||

= | 52 | * | (1+0.065)^-1 | |||||

= | 52 | * | 0.938967136 | |||||

= | 49 | |||||||

C. |
Loan the money to friend or deposit into
bank |
|||||||

Note: | ||||||||

Future value of deposit in 1 year is the same amount what his friend is ready to payback. | ||||||||

So, it will be indiiferent position as both option have same time value of money. |

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