Beda borrows a $10,000 loan from Wendy for 5 years at an effective rate of interest of 8% per year. Wendy offers two options for Beda to repay the loan. 1: Interest payments due at year end are paid at year end, and the principal is repaid after 5 years. 2: The loan is repaid by five level payments over the 5 years. Wendy can only reinvest the repayments of Beda at 7% per annum. (b) Calculate the yield
Beda borrows a $10,000 loan from Wendy for 5 years at an effective rate of interest of 8% per year. Wendy offers two options for Beda to repay the loan. 1: Interest payments due at year end are paid at year end, and the principal is repaid after 5 years. 2: The loan is repaid by five level payments over the 5 years. Wendy can only reinvest the repayments of Beda at 7% per annum. (b) Calculate the yield
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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4.49 (b) Beda borrows a $10,000 loan from Wendy for 5 years at an effective rate of interest of 8% per year. Wendy offers two options for Beda to repay the loan.
1: Interest payments due at year end are paid at year end, and the principal is repaid after 5 years.
2: The loan is repaid by five level payments over the 5 years. Wendy can only reinvest the repayments of Beda at 7% per annum.
(b) Calculate the yield rate of Wendy under Option 2. Explain why the answer obtained is smaller than that in (a).
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