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(a) Loan A: You borrow $10,000 today and will repay the loan with a $10,500 payment one year from now. Calculate the annual rate that underlies this loan, as well as the total interest paid on this loan. (Yes, the answers are simple.)

(b) Loan B: You borrow $10,000 today and will re- pay the loan with 12 end-of-month payments of $866.19. For practice, you might want to verify that a 7.2% APR un- derlies this loan. Calculate the total interest paid on this loan (irrespective of the timing of the cash flows and, thus, in blatant violation of time value of money).

(c) Which alternative would any rational, wealth-maximizing individual choose? If, on Loan B, a person skipped the monthly payments, accrued interest, and instead made a single payment one year from now, how much would he or she have to pay? The point of this question is to support your answer to part c (or maybe to reconsider it if you first had it wrong).

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Financial Management, Finance

Category:- Financial Management
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