When Ruby borrowed $2300, she agreed to repay the loan in two equal instalments, 90 days and 135 days from the date the money was borrowed. If interest is 9.25%, what is the size of the equal payments if a focal date of today is used?
The 2300 is a present value. You know how much she borrowed today. So we are not asking how much will 2300 increase to, but what amount paid in the future is equal to 2300 today.
Notice that the payments are equal. So if we call one payment ‘x’, then the other one is also x. This is a present value problem…..the only difference from the ones we’ve done in class being that we already know the present value.
2300 = x/(1 + 0.0925*90/365) + x(1 + 0.0925*135/365)
2300 = 0.98x + 0.97x
2300 = 1.95x
x = 1179.49
So Ruby can pay off her debt in two equal payments of $1179.49
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