Question

A company has debts of $500,000 due in one years’ time and $800,000 due in five...

A company has debts of $500,000 due in one years’ time and $800,000 due in five years’ time. Given an interest rate of 4.2% p.a. compounding quarterly, what single payment two years from today would extinguish both obligations?

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Answer #1
Payment two years from today means:
$ 500000 paid 1 year(4 quarters) beyond due date, ie. Future value of $ 500000 after 4 quarters at 4.2% /4=1.05% per quarter= 500000*(1+0.0105)^4= 521333.07
$ 800000 paid 3 yrs.(12 quarters) ahead of due date ie. Present value at t=2 of $ 800000 with 12 quarters to go for maturity ,at 4.2% /4=1.05% per quarter= 800000/(1+0.0105)^12= 705755.34
The single payment 2 years from today , that will extinguish both obligations= 1227088.41
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