You borrow $2000 today.This loan is due in 3-years with interest at j₁ = 9%.It is agreed that you will instead pay $1000 one-year from now and $X two-years from now.If money is worth j₂ = 6%,what is the value of X?

Question

Quizplus · Accepted Answer

To solve the problem, we need to equate the present value of the loan with the sum of the present values of the payments.

Present value of the loan = $2000

Present value of $1000 due in 1 year = $1000/(1+0.06) = $943.40

Present value of X due in 2 years = X/(1+0.06)^2

Equating the present values, we get:

$2000 = $943.40 + X/(1+0.06)^2

Solving for X, we get:

X = ($2000 - $943.40) x (1+0.06)^2 = $1380.48

Therefore, the best choice is C.

You Borrow $2000 Today