A friend wants to borrow $1,000 for 3 years. Your investment alternatives yield 10%. You analyze 2 options:

1)Repay interest and principal (a balloon repayment) in full at the end of three years. In that case how much money do you want from him in three years?

2)Repay interest and principal with three equal payments at the end of each of the three years. What size payment should you ask for?

 If your friend offers you payments of $402.11, and your re-investment rate is 10%, then what is the future value of those payments after 3 years?.

Interest comes in two forms:

1.Blended payments

2.Re-investment

With amortized loans, lender only earns i% if can re-invest at i%

What is the amount of interest paid by your friend?

What is the amount of interest that you get for reinvestment at 10%?