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Suppose you take out a 22-year loan from C'ville Bank for 37000 dollars at an interest rate of 5.4 percent effective. To repay the loan, you agree to make equal annual payments, the first coming in one year. After making the 10th payment, you decide to refinance your loan. In particular, you want to reduce your annual payment to 1500 dollars for each of the remaining 12 payments, and then make a large final payment at the end of the original 22-year period to pay off the loan. (This payment will come immediately after the final 1500 dollar loan payment.) To save money for this large final payment, you plan to make equal annual deposits into an account at Richmond Bank earning 10.8 percent effective. These deposits will occur at the same time as the 1500 dollar loan payments, i.e. the first deposit will be one year after you refinance the loan, and the last will be at the time of your final loan payment. C'ville Bank will agree to your plan, provided that their yield rate for the ENTIRE loan is 6.9 percent effective. What will be the amount of each of the annual deposits to your account at Richmond Bank?

Financial Management, Finance

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