Question
A common payment pattern in an amortized loan involves the borrower making level payments of principal. Consider the following: Ben borrows $12,000 from Jen at
A common payment pattern in an amortized loan involves the borrower making level payments of principal. Consider the following: Ben borrows $12,000 from Jen at i(4) = 4%. Ben repays the loan over 6 years by making 24 equal quarterly payments of principal (12,000/24 = $500). Ben also pays interest on the unpaid balance at the end of each quarter. After 2.5 years (10 payments), Jen sells the rights to future loan payments to Ken. (a) What is the outstanding balance of the loan after 10 payments? (3 marks) (b) If Ken wishes to yield i(4) = 6%, what price should he pay Jen? (4 marks)
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