Question

assume you have a chance to buy a promissory note in which you will receive 134 monthly payments of $475, starting a month from now. What price should you pay for the note if you want to earn 9.5% compounded monthly?

Answer 1

To find the price you should pay for the promissory note, calculate the present value of each monthly payment using the present value formula and sum them up.

Therefore, you should pay approximately $57,365.12 for the promissory note.

Step-by-step explanation:

To find the price you should pay for the promissory note, you need to calculate the present value of the future cash flows. First, calculate the present value of each individual monthly payment using the formula: PV = PMT / (1 + r)^n, where PV is the present value, PMT is the monthly payment, r is the interest rate per period, and n is the number of periods. Then, sum up the present values of all the payments to find the price you should pay for the note.

Let's calculate the present value of the monthly payments:

1. First payment: $475 / (1 + 0.095/12)^1 = $471.85
2. Second payment: $475 / (1 + 0.095/12)^2 = $468.73
3. Third payment: $475 / (1 + 0.095/12)^3 = $465.63
4. ...
5. 134th payment: $475 / (1 + 0.095/12)^134 = $130.70

Now, sum up all the present values:

$471.85 + $468.73 + $465.63 + ... + $130.70 = $57,365.12

Therefore, you should pay approximately $57,365.12 for the promissory note.