Assume a bank loan requires an interest payment of $85 a year and principal paym

Question

Assume a bank loan requires an interest payment of $85 a year and principal payment of $1,000 at the end of the loan date/year life.

How much could this loan be sold for to another bank if the loans of similar quality care of a 8.5% interest rate that is what would be the present value of this loan?

Now if the interest rates on other similar quality loans are 10% what would be the present value of his loan?

What would be the present values of the loan if the interest rate is 8% in similar quality loans?

Explanation / Answer

Interest Rate PV for year 1 Cash flow of the loan Present Value 8.50% 0.921658986 1085 1000 10% 0.909090909 1085 986.36 8% 0.925925926 1085 1004.63

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