You owe the bank $2000 in 9 months.Instead you negotiate with the bank to pay $1200 in 3 months and $X in 7 months to fully pay off the loan.Using a simple discount rate of d = 9% and a focal date of 7 months from now,what is X?
A)$732.89
B)$734.44
C)$866.46
D)$877.08

Question

Quizplus · Accepted Answer

The present value of the $1200 payment in 3 months is $1200/(1 + 0.09/4) = $1128.44. The present value of the $X payment in 7 months is $X/(1 + 0.09/4)^2 = $X/1.1881. The sum of these present values must equal the original $2000 loan, so $1128.44 + $X/1.1881 = $2000. Solving for $X, we get $X = $732.89.

You Owe the Bank $2000 in 9 Months