Assume a bank loan requires an interest payment of $85 per year and a principal payment of

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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.

a. How much could this loan be sold for to another bank if loans of similar quality carried an 8.5 percent interest rate? That is, what would be the present value (PV) of this loan? 8.5% for 8 years:

b. Now, if interest rates on other similar quality loans were 10 percent, what would be the PV of this loan?

c. What would be the PV of the loan if the interest rate is 8 percent on similar quality loans?

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Introduction to Finance Markets Investments and Financial Management

ISBN: 978-1118492673

15th edition

Authors: Melicher Ronald, Norton Edgar

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Question Posted: Mar 27, 2015 12:17 PM

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Assume a bank loan requires an interest payment of $85 per year and a principal payment of

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a This loan would have a present value of 1000 the same as the 1000 curr...View the full answer

Introduction to Finance Markets Investments and Financial Management

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