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Old 09-11-2019, 11:06 PM
rebel_ao rebel_ao is offline
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Default Discounting Principle

A $40,000 loan is to be repaid in level installments at due at the end of each year. The effective interest rate is 5%. The principal contained in the third installment is $460. To the nearest $10, what is the amount of each installment?

Since its a loan with level installments, can I not discount the P(3) back to t=1.

By calculating interest on the loan amount and adding the discounted principal it should give me the loan payment right?

I tried this approach and my answer was off.
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Old 09-12-2019, 09:09 AM
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Gandalf Gandalf is offline
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Quote:
Originally Posted by rebel_ao View Post
A $40,000 loan is to be repaid in level installments at due at the end of each year. The effective interest rate is 5%. The principal contained in the third installment is $460. To the nearest $10, what is the amount of each installment?

Since its a loan with level installments, can I not discount the P(3) back to t=1.
Yes, you could

Quote:
By calculating interest on the loan amount and adding the discounted principal it should give me the loan payment right?
No, because it is repaid with level installments the interest portion goes down every year. So you would need to calculate interest on the remaining balance at the start of year 3, not interest on the loan amount.
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Old 09-12-2019, 11:09 PM
Academic Actuary Academic Actuary is online now
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I think he is saying P(1) = 460/(1.05)^2, I(1) = 2000 so the payment is the sum. Seems right to me. Gives a loan with 36 payments.
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