Question

A debt of RM900 due in five months and another of RM1000 due in ten months are to be settled by a single payment at the end of seven months. Find the size of this payment using

a. The present as the focal date,

b. The date of the settlement as the focal date

Assuming the money is worth 8% per annum simple interest.

Answer 1

Given,

Interest rate= 8% p.a. (simple)

Payments due: RM 900 in 5 months and RM 1000 in 10 months

Settlement: In 7 months

Part (a):

Single payment with present as focal date= FV of P

Where FV= Future value after 7 months and P= Present value as on today of the payments due.

P= 900/(1+8%*5/12) + 1000/(1+8%*10/12) = RM1,808.47

Amount of single payment= 1808.47*(1+8%*7/12)= RM1,892.86

Part (b):

Single payment with settlement date as focal date= FV of P1 + PV of P2

Where FV of P1 is the future value of first payment due in 7 months (2 months later) and PV of P2 is the Present value of second payment in 7 months (3 months earlier)

=900*(1+8%*2/12) + 1000/(1+8%*3/12)

= RM 1,892.39