Paula is trying to get a loan for $10,000 to start a business as a financial...

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Paula is trying to get a loan for $10,000 to start a business as a financial advisor and is trying to decide between several options. (15 points) i) ii) A $10,000 loan that needs to be paid back after 5 years with a 5% nominal annual interest rate, compounded monthly. A $10,000 loan that needs to be paid back after 6 years, the first 2 years there is no interest, and after the annual effective interest rate is 10%. Hint: When solving for the annual payment consider PV=A+A+A(P/A, i%,n), where A is the uniform annual payment. Assuming that in each case he plans to make equal yearly payments for the full length of the loan, starting in year 1: a. What is the amount of his yearly payment in each case? b. Now assume that the interest rate of the market is an effective annual rate of 3%, what is the present value of the annuity payments for each option? Based on this metric, which is better? Paula is trying to get a loan for $10,000 to start a business as a financial advisor and is trying to decide between several options. (15 points) i) ii) A $10,000 loan that needs to be paid back after 5 years with a 5% nominal annual interest rate, compounded monthly. A $10,000 loan that needs to be paid back after 6 years, the first 2 years there is no interest, and after the annual effective interest rate is 10%. Hint: When solving for the annual payment consider PV=A+A+A(P/A, i%,n), where A is the uniform annual payment. Assuming that in each case he plans to make equal yearly payments for the full length of the loan, starting in year 1: a. What is the amount of his yearly payment in each case? b. Now assume that the interest rate of the market is an effective annual rate of 3%, what is the present value of the annuity payments for each option? Based on this metric, which is better?

Answer rating: 100% (QA)

a To calculate the annual payment for each loan we can use the formula for the present value of an a... View the full answer