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Problem 39.28 in Dr. Fin. FM book

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  • Problem 39.28 in Dr. Fin. FM book

    Problem 39.28
    E Corp has a $100,000 loan outstanding on which it has been paying semi-annual interest payments
    of $4,000. E Corp has also been accumulating deposits made at the end of every 6 months in a
    sinking fund earning 5% effective annual interest so that it can retire the loan at the end of the 15th
    year. The lender has offered to accept 103% of the sinking fund balance immediately after the 29th
    deposit in exchange for the outstanding loan balance and the remaining loan interest payment. At
    what effective annual rate was the lender calculating the present value of the remaining amounts
    in order to make this offer equivalent in value?


    So I calculated the semiannual payment is 2288.85 and the balance of the sinking fund immediately after the 29th deposit is 95356.32
    What do I do next? I'm lost from this step. The answer is 12.12% by the way. Help please.

  • #2
    Nvm, I figured out how to do it.

    Let 1.03*95356.32*(1+j) = 100,000 + 4,000 where j is the interest rate in 6 months. Solve for (1+j)^2 - 1, you'll get 0.1212

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