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You borrow $350 from your parents this year and will have to borrow $350 again in...

You borrow $350 from your parents this year and will have to borrow $350 again in two years. They agree to charge at an effective annual interest rate of 6%. After one year, you receive a 705 bonus check at work. Because you know you like to spend money when you get it, you decide to pay off all your debts with your parents (past and future) and this time. Will your bonus check cover?

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Answer #1

First, we need to discount the future loan back to year 1

PV = FV / (1 + r)^n

= $350 / (1 + 0.06)^1

= $330.19

Now, We need to find the future value of loan taken today

FV = PV * (1 + r)^n

= $350 * (1 + 0.06)^1

= $371

Total Loan Value at year 1 = $330.19 + $371 = $701.19

As the bonus check is of $705 and the required payment is $701.19.

So, yes the bonus check will cover all debts.

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