Question

Assume a bank loan requires an interest payment of $85 per year and a principal payment of $1,000 at the end of the loan's eight-year life. What would be the present value of this loan if it carried a 10% interest rate?

Answer 1

Answer:

The present value is  $PV = \ 396,987$

Step-by-step explanation:

From the question we are told that

   The  interest payment per year is  $C = \ 85$

    The principal payment is  $P = \ 1000$

     The  duration is  n =  8   years

      The  interest rate is  $r = 10\% = 0.10$

The present value is  mathematically represented as

      $PV = [ \frac{C}{r} * [1 - \frac{1 }{ (1 +r)^n} ] + \frac{P}{(1 + r)^n} ]$

substituting values

      $PV = [ \frac{85}{0.10} * [1 - \frac{1 }{ (1 +0.10)^8} ] + \frac{1000}{(1 + 0.10)^ 8} ]$

      $PV = \ 396,987$