You have just taken out a five-year loan from a bank to buy an engagement ring. The ring costs $5000. You plan to put down $1000 and borrow $4000. You will need to make annual payments of $1000 at the end of each year. Show the timeline of the loan from your perspective. How would the timeline differ if you created it from the bank’s perspective?
To show: The timeline from Person X’s perspective and the difference in the timeline that is created from the bank’s perspective.
Introduction:
The timing of cash flows that are represented in a linear form is known as a timeline.
Explanation of Solution
Given information:
Person X has just taken a 5-year loan from a bank to purchase an engagement ring. The cost of the ring is $5000. Person X makes a plan to borrow $4000 and put down $1000. Person X has to make the annual payments of $1000 at the end of every year.
Timeline from the perspective of Person X:
Explanation:
The above timeline describes the perspective of Person X and the timeline is the same for the bank’s perspective. However, the signs are reversed from the bank’s perspective.
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Chapter 4 Solutions
MyLab Finance with Pearson eText -- Access Card -- for Corporate Finance (Myfinancelab)
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