Bank A offers you a loan which you will repay over 5-years at j₁₂ = 6% with monthly payments of $1500.Bank B offers you the same loan amount,but at j₄ = 6%,which you will repay over 5-years with quarterly payments of $R.What is the maximum value of R for you to even consider Bank B?

Question

Quizplus · Accepted Answer

To compare the loans, we need to calculate the present value of the payments for both banks and ensure they are equal. Bank A's loan has an effective monthly interest rate of 0.5% (6%/12), and Bank B's loan has an effective quarterly interest rate of 1.5% (6%/4). The present value of Bank A's loan payments is calculated using the formula for the present value of an annuity. We then use this present value to find the maximum quarterly payment R for Bank B using the same formula. The correct maximum value of R is $4519.19.

Bank a Offers You a Loan Which You Will Repay