Suppose a Family Member Approaches You to Borrow $2,000 for the Down

question 63

Essay

Suppose a family member approaches you to borrow $2,000 for the down payment on an automobile. You have the cash available in a savings account that currently earns 5% annual interest. You and the family member consider the following repayment options:
(i) Borrower repays $259 each year over the next ten years
(ii) Borrower repays $300 each year over the next five years, plus a lump-sum payment of $895 in the fifth year.
(iii) Borrower repays you $2,100 at the end of one year.
For each of the options above, show that the present values of each option are approximately equal. Then, relate each of the options above to the four types of bonds, indicating which option is equivalent to which type of bond. Explain why.

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Definitions:

Tomography

An imaging technique that creates a detailed cross-sectional image of the body, used in various medical fields.

Radioactive Isotope

An isotope of an element that decays over time, releasing radiation.

Tracing

A process or technique used to investigate and follow the course or progression of something, often used in contexts such as data analysis, drawing, or medical diagnostic processes.

Tagging

The process of adding identifiers such as tags or labels to something for the purpose of identification or tracking.