Question

Princess Leia borrows 500,000 for 20 years at a 6% annual effective interest rate. Her annual payments are 15,000 for the first 10 years and P for the second 10 years. 1. a. Find the outstanding balance at time 10 (hint: you don't need P to calculate this value) What is the special term used to describe the interest over the first 10 years demonstrated in the problem? b. c. Extra credit (5 pts) Calculate P 2. MSOE Private Equity Discovery Fund is considering loans of 10,000 each to 50 entrepreneurs. The loans are due in 3 years and are to be paid off by one payment of principal and accumulated interest on the due date. The Fund wishes to earn a minimum 1200 annual retum on the overall entrepreneur loan portfolio. For the 50 person group, the Fund projects that 2 will default on the loan with no recovery, and another 2 will default with a 50% recovery of the amount due. Find the effective annual interest rate that the Fund must charge in order to meet its target return.

PLEASE PROVIDE THERE ARE 3 QUESTIONS. NEED HELP WITH ALL 3 QUESTIONS.

Answer 1

Ans: 1) Princess Leia

a) Time    Cash Paid   Present Value Factor @ 6%   Present Value

1-10    $15,000 7.36 $110,401

Initial Inflow $500,000 1 ($500,000)

Outstanding Balance $389,599

b) Equivalent Annual Payment

c) Time    Cash Paid   Present Value Factor @ 6%   Present Value

    1-10    $15,000 7.36 $110,401

   11-20 P    4.11 $389,599  

P = $389,599/4.11

P= $94,793

2) MSOE Private Equity Discovery Fund

Time Loan Amount Future Value Factor@12%    Future Value

1-3    $ 500,000 1.405    $702,500

1-3 100%Default    $20,000 1.405 -$ 28,100

1-3 50%Default    $10,000 1.405 -$ 14,050

   $ 660,350

Effective interest rate = $660,350/((1+X)^3)=$500,000

   Here X is Interest Rate

   X = 9.72 %

3) Cumulative present value Factor for 4 Years

Time Present value factor

1    0.93

   2    0.86

   3    0.82

   4 0.79

   3.4

Annual Equivalent Payment = $100,000/3.4

= $ 29,410

payment   intrest due   principal repaid   Outstanding Balances
$100000
29410 $8000 $21,410 $78,590
29410 $6,287 $23,123    $55,467
29410 $2,219 $27,191    $28,278
29410    $1,131    $28,280    $0