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varying series of payments

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  • varying series of payments

    "A borrower is repaying a $1000 loan with 10 equal payments of principal. Interest at 6% convertible semiannually is paid on the outstanding balance each year. Find the price to yield an investor 10% convertible semiannually." (Answer: $908.87)"

    Here's what I have done...

    Principals are "made" at the end of each year... 100 at year 1, 100 at year 2 ... 100 at year 10.
    The interests are computed as 30 at year 1, 27 at year 2, 24 at year 3, ... 3 at the year 10.

    The price that is asked in the problem... how am I going to find it? Am I computing the present value at time 0 of the remaining payments (PV of the principals + PV of the interests)at rate .05? Or Am I computting the accumlated value at time 10 of all the past payments (AV of the principals + Av of the interests) at rate .03...
    then multiplying this value at (1.05)^-20?

  • #2
    Really old post but I was having trouble with this question last night as well.

    The question wasn't worded corrected in my opinion because it didn't say all the payments are semiannual. If you assume the borrower is repaying with semiannual payments of 100 and is paying the interest semiannually, you will get the answer in the back of Kellison.