Suppose you borrow $20,000 at an effective periodie rate of i. The loan will be paid...

 

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Suppose you borrow $20,000 at an effective periodie rate of i. The loan will be paid back with 20 payments at the end of each period. Each payment will consist of $1,000 plus the interest owed for that period. For example, the first payment will be $1,000 + $20, 000i. Show that the present value of these payments at interest ratei is $20,000. Hint: Try to figure out what the pattern the payments follow. Follow up hint: You may recognize one of the pieces as a decreasing annuity. Suppose you borrow $20,000 at an effective periodie rate of i. The loan will be paid back with 20 payments at the end of each period. Each payment will consist of $1,000 plus the interest owed for that period. For example, the first payment will be $1,000 + $20, 000i. Show that the present value of these payments at interest ratei is $20,000. Hint: Try to figure out what the pattern the payments follow. Follow up hint: You may recognize one of the pieces as a decreasing annuity.

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In this case where the interest rate on loan is equal to the required rate of return ie i hence in t... View the full answer