You want to borrow 10000€. Bank A offers you a loan contract according to which you have to pay back the loan in 10 annual installments of 1200€ per year (the first installment is due one year after signing the contract). Bank B also offers you a contract with 10 annual installments, but you have to pay 1100€ annually during the first 5 years and 1300€ annually during years 6 - 10. Finally, bank C requires you to pay annually 1300€ during years 1−5 and 1100€ during years 6-10. Which of the three contracts is best for you if you want to miminize the present value of the installments based on a constant annual interest rate of 5% ?
You want to borrow 10000€. Bank A offers you a loan contract according to which you have to pay back the loan in 10 annual installments of 1200€ per year (the first installment is due one year after signing the contract). Bank B also offers you a contract with 10 annual installments, but you have to pay 1100€ annually during the first 5 years and 1300€ annually during years 6 - 10. Finally, bank C requires you to pay annually 1300€ during years 1−5 and 1100€ during years 6-10. Which of the three contracts is best for you if you want to miminize the present value of the installments based on a constant annual interest rate of 5% ?
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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You want to borrow 10000€. Bank A offers you a loan contract according to which you have to pay back the loan in 10 annual installments of 1200€ per year (the first installment is due one year after signing the contract). Bank B also offers you a contract with 10 annual installments, but you have to pay 1100€ annually during the first 5 years and 1300€ annually during years 6 - 10. Finally, bank C requires you to pay annually 1300€ during years 1−5 and 1100€ during years 6-10. Which of the three contracts is best for you if you want to miminize the present value of the installments based on a constant annual interest rate of 5% ?
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