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Financial Mathematics Old FM Forum 

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#1




FM Question
"John borrows 10,000 from Tony and agrees to repay the loan with 10 equal annual installments of principal plus interest on the unpaid balance at 5% effective. Immediately after the loan is made, Tony sells the loan to Chris for a price which is equal to the present value of John's future payments calculated at 4%. Calculate the price that Chris will pay for the loan."
The answer in the back of the book (Finan, 41.2) is 10,472.28 but I get 10,503.98. It seems straightforward. 10,000 * a_10_.04 / a_10_.05. I would appreciate your feedback. Thank you. 
#2




If I treat it as an immediate annuity, I get 10,503.98; if I treat it like an annuity due, I get 10,403.98.
Is there errata for this question?
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"I'm tryin' to think, but nuthin' happens!" 
#3




The loan isn't paid in equal installments, it's paid in equal installments of principal.

#4




Neither, you are both interpreting the payment stream differently from the Finan's intent.
He means (10 equal annual installments of principal, thus 1000 each) (plus interest on the unpaid balance at 5% effective) If he meant a level annuity, wouldn't you expect him to just say 10 equal annual installments? or 10 equal annual installments of principal and interest? The wording certainly could have been clearer and I hope and think it would be on an exam question. ninja'd 
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