Five years ago you incurred a 10-year term loan that required annual payments of
ID: 1172774 • Letter: F
Question
Five years ago you incurred a 10-year term loan that required annual payments of $1,150 per year. You have made four payments in previous years and the fifth payment is due today. The note holder proposes that you buy back this note today for $4,395. Would it pay you to borrow the money at the bank at 13% interest rate and buy back this note (hint: calculate the market value of the loan and compare with the price for which the bank is willing to sell you the note)? Five years ago you incurred a 10-year term loan that required annual payments of $1,150 per year. You have made four payments in previous years and the fifth payment is due today. The note holder proposes that you buy back this note today for $4,395. Would it pay you to borrow the money at the bank at 13% interest rate and buy back this note (hint: calculate the market value of the loan and compare with the price for which the bank is willing to sell you the note)?Explanation / Answer
Market value of loan at end of year 5 = current payment + [PVA 13%,5 **Amount]
1150+ [3.51723*1150]
1150 + 4044.81
5194.81
since the buyback amount is lower than market value of loan ,loan should be buyback .
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