Question

Assume a bank loan requires an interest payment of $85 per year and a principal payment of $1,000 at the end of the loan's eight-year life. What would be the present value of this loan if it carried a 10 percent interest rate?

Answer 1

$919.98

Explanation:

To solve using a financial calculator do

N=8

I/Y=10

PMT=85

FV=1000

CMPT PV get 919.98

To do by hand find the present value of the interst payments

85*(1-(1/1.1)^8)

which is 453.4687

Find the present value of the final ballon payment

1000*(1/1.1)^8

which is 466.507

take the sum

466.507+453.4678= 919.98