Question

Brian borrows $15,000 from Mary and agrees to repay with 12 installments payable half-yearly. The effective...

Brian borrows $15,000 from Mary and agrees to repay with 12 installments payable half-yearly. The effective interest rate is 6.09% per annum. When the 6th payment is due, Brian repays the outstanding loan balance by a lump sum.

a.) Calculate the lump sum payment of Brian

b.) Calculate the loss of interest income of Mary

Please show all work by hand, without using a finance calculator or Excel. Thank you.

Homework Answers

Answer #1

First we calculate the monthly payments PMT

Let the semi-annual rate be r, then

(1+r)^2 = (1+6.09%)

(1+r) = 1.03

r = 3%

PV = 15000

n = 12

15000 = PMT*[(1-(1+0.03)^(-12))/0.03]

PMT = $1506.93

a)

Lump sum payment = PV of all the future payments after 6th installments + 6th installment due

+ 1506.93

Lump sum payment = 1506.93*[(1-(1+0.03)^(-6))/0.03]+1506.93

Lump sum payment = $9670.26

b)

Loss of interest = Total 12 payments expected at the start of loan - Total 5 installments and the lumpsum payment

Loss of interest = 12*1506.93 - (5*1506.93+9670.26)

Loss of interest = $878.25

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT