an can be repaid in two ways: (i) a perpetuity-due with annual payment $1000; (ii) a 3-year deferred annuity-immediate with 10 annual payments of $Q. Calculate Q if the annual effective interest rate is 7%.

an can be repaid in two ways: (i) a perpetuity-due with annual payment $1000; (ii) a 3-year deferred annuity-immediate with 10 annual payments of $Q. Calculate Q if the annual effective interest rate is 7%.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 12P

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Concept explainers

Cost of Credit

The cost of credit is an extra amount that the borrower has to pay besides the loan amount. These credit charges may vary from loan to loan. The cost of credit includes interest charges, maintenance charges, and arrangement charges. Some of the costs are mandatorily collected by the lender based on the loan amount and tenure of the loan. The cost of credit is also called finance charges of the credit.

Question

A loan can be repaid in two ways:

(i) a perpetuity-due with annual payment $1000;

(ii) a 3-year deferred annuity-immediate with 10 annual payments of $Q.

Calculate Q if the annual effective interest rate is 7%.

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