You need some money today and the only friend you have that has any is your miserly friend. He agrees to loan you the money you need, if you make payments of $15 a month for the next nine months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 2% interest per month. How much money are you borrowing?

Question

Quizplus · Accepted Answer

The loan is an annuity due, where payments are made at the beginning of each period. The present value of the loan can be calculated using the formula for the present value of an annuity due: PV = Pmt * [(1 - (1 + r)^-n) / r] * (1 + r). Here, Pmt = $15, r = 0.02, and n = 9. Calculating this gives approximately $124.88.

You Need Some Money Today and the Only Friend You