Question

A borrows 10,000 from B and repays with 40 quarterly installments at a 4% annual effective rate. After 6 years, B sells the rights to future payments to C, at a price which yields C 6% annual effective over the remaining installment periods. What price did C pay

Answer 1

Answer:

$4,303.68

Explanation:

Quarterly payment = $10,000 / 32.835 (PVIFA, 1%, 40 periods) = $304.55

After 6 years, the principal due = $4,483

Present value of an annuity = payment x PVIFA = $304.55 x 14.13126 (PVIFA, 1.5%, 16 periods) = $4,303.68

The difference is not significant since the remaining payments are not many, and the increase in quarterly rate is only 0.5%