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Financial Mathematics Old FM Forum

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  #1  
Old 03-28-2019, 04:29 AM
Sullinator Sullinator is offline
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A borrower takes out a loan of 4000 at an annual effective interest rate of 6%. Starting at the end of the fifth year, the loan is repaid by annual payments, each of which equals 600 except for a final payment that is less than 1000. Calculate the final balloon payment.

Why can’t there be 12 payments of 600? The solution is saying it is 11. Is this because if it’s 12 payments of 600 you will have a drop instead of ballon payment?

Last edited by Sullinator; 03-28-2019 at 05:35 AM..
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Old 03-28-2019, 09:00 AM
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I think the intent is that the last payment must be larger than 600. I hope the wording of an actual exam question would be more precise.
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Old 03-28-2019, 10:13 AM
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I understood that the last payment is larger because they said it is balloon. I was just wondering that the reason it’s not 12 payments of 600 is because that would mean the 13th payment would be a drop payment.
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Old 03-28-2019, 10:38 AM
barrilete.cosmico barrilete.cosmico is offline
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That's correct. There are 11 payments of 600 and, as the 12th is the balloon payment, this is larger than 600.
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Old 03-29-2019, 08:17 AM
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Quote:
Is this because if it’s 12 payments of 600 you will have a drop instead of ballon payment?
If you can point me to where in the course this problem comes from then I'll double check the problem.

A ballon payment is a final payment larger than the regular payment. So the answer has to be a payment larger than 600.
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Old 03-31-2019, 01:49 PM
Sullinator Sullinator is offline
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Quote:
Originally Posted by Bama Gambler View Post
If you can point me to where in the course this problem comes from then I'll double check the problem.

A ballon payment is a final payment larger than the regular payment. So the answer has to be a payment larger than 600.
Yea thanks James I understand how to do it now. Itís on 1.3 D. Drop Patment vs Ballon.
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