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Interest Rate

1) The principal plus interest at 10% compounded quarterly on a $15000 loan made 2.5 yrs ago is due in two years. The debtor is proposing to settle the debt by a payment of $5000 today and a a second payment in one year that will place the lender in an equivalent financial position, given that money can now only 6% compounded semiannually. what should be the amount of the 2nd payment? Also, demonstrate that the lender will be in the same financial position two years from now with either repayment alternative?

2) A bank offers a rate of 5% compounded semiannually on its 4 year GIC.What monthly compounded rate should the bank offer on 4 year GICs to make investors indifferent between the alternatives.

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Solution Preview

First we need to calculate the Future value of the loan under the current situation. You can either use a financial calculator or excel to determine that. I'll show you Excel formulas. In Excel type in the following formula:
=FV(rate,Periods, Payment, Present Value)
Now in order to determine the 2nd payment amount (A year from ...

Solution Summary

The solution goes into a great amount of detail related to the time value questions being asked. The solution is very easy to follow along and can be easily understood by anyone with a basic understanding of the concepts. The solution answers all the question(s) being asked in a succinct way. Excel formulas are shown as well so that student can use those to solve similar problems in the future. Overall, an excellent response.