A company borrowed $10 million for five years from Atlantic Bank. The company pa

Question

A company borrowed $10 million for five years from Atlantic Bank. The company pays Atlantic Bank a fixed annual rate of 8 percent and must pay back the $10 million loan at the end of the borrowing period. A year has passed since the loan was made and Atlantic Bank wants to sell the loan to Pacific Bank.

A. If the interest rate is now 7 percent, what is the value of the loan?

B. What would be the value of the loan if the company was paying the bank 4 percent every six months instead of 8 percent per year?

Explanation / Answer

A.

AFTER ONE YEAR

FV=10 MN

PMT=0.8 MILLION

1/Y=7

N=4

CLICK CPT

PRESS PV=10.3387 MILLION IS THE VALUE OF LOAN

B.

AFTER ONE YEAR

FV=10 MN

PMT=0.4 MILLION

1/Y=3.5

N=8

CLICK CPT

PRESS PV=10.3437 MILLION IS THE VALUE OF LOAN

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