Question

Your friend will loan you the money you need today if you agree to make payments...

Your friend will loan you the money you need today if you agree to make payments of $110 a month for the next 18 months. The friend requires that the first payment be made today (i.e. immediately after the loan amount is disbursed). The friend charges you interest at 21.00% compounded semi-annually. How much money are you borrowing today?

Question 3 options:

$1,725

$1,768

$1,811

$1,854

$1,898

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Homework Answers

Answer #1

We need to calculate the present value of immediate annuity. Following is the formula for the same:

Where,

  • PMT = $110 (per month)
  • Interest, r = 21% PA = 1.75% (per month)
  • Tenure, n = 18 months

Putting the values in the formula, we get:

Hence, the money borrowed today is $1,725.

The correct answer is Option A ($1,725).

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