A friend asks to borrow $52 from you and in return will pay you $55 in one year

Question

A friend asks to borrow $52 from you and in return will pay you $55 in one year if your bank is offering a 61% interest rate on deposits and loans: a. How much would you have in one year if you deposited the S52 instead? b. How much money could you borrow today if you pay the bank $55 in one year? c. Should you loan the money to your friend or deposit it in the bank? a. How much would you have in one year if you deposited the S52 instead? If you deposit the money in the bank today you will have S in one year. (Round to the nearest cent.) b. How much money could you borrow today if you pay the bank $55 in one year? You will be able to borrow Stoday. (Round to the nearest cent.) c. Should you loan the money to your friend or deposit it in the bank? (Select from the drop-down menu.) From a financial perspective, you should V, as it will result in more money for you at the end of the year.

Explanation / Answer

a. Amount in one year $    55.17 Working: Amount in one year = Amount deposited today x Future value of 1 = $    52.00 x 1.061 = $    55.17 Future Value of 1 = (1+i)^n Where, = (1+0.061)^1 i 6.1% = 1.061 n 1 b. Amount to be borrowed $    51.84 Working: Amount to be borrowed = Amount to be repaid x Present value of 1 = $    55.00 x      0.9425 = $    51.84 Present Value of 1 = (1+i)^-n Where, = (1+0.061)^-1 i 6.1% =      0.9425 n 1 c. Depsit it in the bank Working: Borrowing Deposit Present Value $    51.84 $    52.00 Future Value $    55.00 $    55.17 In one year, Bank is paying more than friend wil return.So, it is better to deposit into bank.

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