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.
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. At what amount 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? b. Now, if interest rates on other similar quality loans are 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?
Please show original formulas for each part.
Please show original formulas for each part.
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