Problem: Suppose you are a loan officer for a bank. A start-up company has qualified for a loan. You are pondering various proposals for repayment:
1. Lump sum of $500,000 four years hence. How much will you lend if your desired rate of return is:
a. 12%, compounded annually?
b. 16%, compounded annually?
2. Repeat number 1, but assume that the interest rates are compounded semiannually.
3. Suppose the loan is to be paid in full by equal payments of $125,000 at the end of each of the next 4 years. How much will you lend if your desired rate of return is:
a. 12%, compounded annually?
b. 16%, compounded annually?