Mr. Davis bought a life insurance policy 10 years ago and has a cash value of...

Mr. Davis bought a life insurance policy 10 years ago and has a cash value of $500,000. Mr. Davis would like to borrow $100,000 of his money then pay it back with a 15 end of year payments at an annual rate of 8% compounded quarterly. What effective rate will Mr. Davis be paying and how much will his payments be? Use formulas and solve by hand please. NO EXCEL. Answer: 8.24%, $11,857.03

Solutions

Expert Solution

Formula to calculate effective interest rate
Effective interest rate	(1+(r/n))^n - 1
where r is the interest rate and n is the number of compounding
Calculation of effective interest rate

Effective interest rate	(1+(0.08/4))^4 - 1
Effective interest rate	1.02^4 - 1
Effective interest rate	8.24%

Formula to calculate yearly payments under loan
Present value	Yearly payments*((1-(1+r)^-n)/r)

where r is the interest rate and n is the number of years.
Calculation of yearly payment is shown below
$100,000	Yearly payments*((1-(1.0824^-15)/0.0824))
$100,000	Yearly payments*((1-(1.0824^-15)/0.0824))
$100,000	Yearly payments*(0.695218/0.0824)
$100,000	Yearly payments*(0.695218/0.0824)
$100,000	Yearly payments*8.433817
Yearly payments	100000/8.433817
Yearly payments	$11,857.03

jeff jeffy answered 1 year ago

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