Problem 3 A) Pierluigi is trying to get a loan for $10,000 to start a business...

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Finance

Problem 3 A) Pierluigi is trying to get a loanfor $10,000 to start a business as a financial advisor and istrying to decide between several options. (15 points)
i) A $10,000 loan that needs to be paid back after 5 years witha 5% nominal annual interest rate, compounded monthly.
ii) A $10,000 loan that needs to be paid back after 6 years, thefirst 2 years there is no interest, and after the annual effectiveinterest rate is 10%. Hint: When solving for the annual paymentconsider PV=A+A+A(P/A,i%,n) where A is the uniform annualpayment.
Assuming that in each case he plans to make equal yearlypayments for the full length of the loan, starting in year 1:
What is the amount of his yearly payment in each case? (2*5points)
Now assume that the interest rate of the market is an effectiveannual rate of 3%, what is the present value of the annuitypayments for each option? Based on this metric, which is better?(4+1 points
PLEASE BE DETAILED IN YOUR EXPLANATION, THANK YOU!

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4.3 Ratings (644 Votes)

a i Equal yearly payments for the 5 years Using PV of annuity formula 10000Pmt11rnr where PV the value of the loan amt 10000 Pmt Mthly payment to be found out converted to annual r mthly compounding rate of interest See Answer

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Problem 3 A) Pierluigi is trying to get a loanfor $10,000 to start a business as a financial advisor and istrying to decide between several options. (15 points)i) A $10,000 loan that needs to be paid back after 5 years witha 5% nominal annual interest rate, compounded monthly.ii) A $10,000 loan that needs to be paid back after 6 years, thefirst 2 years there is no interest, and after the annual effectiveinterest rate is 10%. Hint: When solving for the annual paymentconsider PV=A+A+A(P/A,i%,n) where A is the uniform annualpayment.Assuming that in each case he plans to make equal yearlypayments for the full length of the loan, starting in year 1:What is the amount of his yearly payment in each case? (2*5points)Now assume that the interest rate of the market is an effectiveannual rate of 3%, what is the present value of the annuitypayments for each option? Based on this metric, which is better?(4+1 pointsPLEASE BE DETAILED IN YOUR EXPLANATION, THANK YOU!