Question

You have a loan outstanding. It requires making three annual payments at the end of the next three years of $1000 each. Your bank has offered to restructure the loan so that instead of making the three payments as originally agreed, you will make only one final payment at the end of the loan in three years. If the interest rate on the loan is 5%, what final payment will the bank require you to make so that it is indifferent between the two forms of payment

Answer 1

Answer:

$2722.82

Explanation:

Present value of loan = $1,000 * [(1+5%)^3 - 1]/ 5%

= $1,000 * (1.157625 - 1) / 0.05

= $1,000 * 0.157625/ 0.05

= $1,000 * 3.1525

= $3152.50

The present value of loan before bank restructuring is $3152.

Future value = Cash flow / (1+r)^n

= $3152 / (1+0.05)^3

= $3152 / (1.05)^3

= $3152 / 1.157625

= $2722.82

Therefore, the final payment required to pay to make indifferent for both payment is $2722.82