To help middle-income students ﬁnance the cost of their university educations, the Student Loan Authority guarantees student loans made by private banks. By guaranteeing the loans, the agency enables the banks to make the loans at rates far lower than they would without the guarantees.
In 2014 the agency guaranteed $120 million of loans. It estimates that, owing to student defaults, it will have to fulﬁll its guarantees as follows (in millions):
Year .... Amount
2015 ... $0.5
2016 ... 1.2
2017 ... 2.0
2018 ... 1.8
1. Prepare the entry that the agency should make in 2014, the year it guarantees the loans. The agency applies a discount rate of 6 percent. It assumes that all guarantee payments will be made at the end of the indicated years.
2. Prepare the entry that it should make at the end of 2015, assuming that it fulﬁlls its guarantees, as estimated, of $0.5 million.