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% interest rate?

Answer 1

The present value is
`PV = \$ 396,987`

Explanation:

From the question we are told that

The interest payment per year is
`C = \$ 85`

The principal payment is
`P = \$ 1000`

The duration is n = 8 years

The interest rate is
`r = 10\% = 0.10`

The present value is mathematically represented as

`PV = [ (C)/(r) * [1 - (1 )/( (1 +r)^n) ] + (P)/((1 + r)^n) ]`

substituting values

`PV = [ (85)/(0.10) * [1 - (1 )/( (1 +0.10)^8) ] + (1000)/((1 + 0.10)^ 8) ]`

`PV = \$ 396,987`