You borrowed S30,000 to finance the education expenses for your senior year of c

Question

You borrowed S30,000 to finance the education expenses for your senior year of college at the beginning of your senior year. The loan will be paid off over five years and the first installment will be due a year later. The loan carriers an interest rate of 9% per year and is to be repaid in equal an u installments over the next five years Suppose you want to negotiate with the bank to defer the first loan installment until the end of year 2. (But you still desire to make five equal installments at 9% interest.) If the bank wishes to earn the same profit, what should be the new annual installment?

Explanation / Answer

Ans 1) will use present valueo fo annuity formual to find the yearly payment

PV of annuity = payment * (1 - ( 1+ r)^-n )/r

30000 = payment * (1 - (1+.09)^-5)/.09

payment = $7712.77

Ans 2) After 1 year current value of loan = $30000 * 1.09 = $32700

$32700 = payment * (1 - (1+.09)^-5)/.09

payment = $8406.92

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