Question

Don Manuel García Ferrer is self-employed and is dedicated to installing air conditioners. His friend, Mr. Antonio López Hernández, has decided to set up a Business Accounting and Taxation business. For this he needs to make an initial investment of € 40,000. As his friend Manuel is doing very well, he has chosen to borrow from him instead of going to a bank. Don Manuel will give Don Antonio the amount of € 40,000 by bank transfer on September 15, 2016. They have agreed that Don Antonio will return the amount in four annual payments. The payment of each annual fee will be made at the end of each year with an annual interest of 4%. To document the payments, four bills of exchange corresponding to each annuity will be issued. To make sure of the collection of the amounts, Don Manuel has requested that the payment of the letters be guaranteed by the father of his friend, Mr. Luis López Pérez.

Don Manuel has decided to buy a new second-hand vehicle. To pay for this acquisition, he endorses the first letter to Doña Alicia Martínez Castro on October 01, 2016.

• Determine the total amount to be paid at the expiration of each installment with the detail of interest calculation, as well as the total amount that Mr. Antonio will end up paying for the loan received.
• Fill in the official models the four bills of exchange with all its clauses. By being present all parties are accepted at the time of signing the contract.

Answer 1

The present value of Don Antonio's loan from Don Manuel is $ 40000

interest rate, r= 4% p.a.

No.of annual installments= 4

With these inputs, we can find the amount of each year-end installment

by using the Present value of ordinary annuity formula & plugging in the above values

ie. PV=Annual Installment*(1-(1+r)^-n)/r

ie. 40000=Annual Instal.*(1-1.04^-4)/0.04

Solving the above,

Annual Installment=40000/((1-1.04^-4)/0.04)=

11019.60

Now, we will find how much goes towards interest & how much towards loan balance

Date & year	No.of pmt.	Annual Installment	Towards Int.	Tow. Loan	Loan Bal.
	1	2	3=Prev. bal. in 5*4%	4=2-3	5=Prev.bal. in 5-current 4
Sep, 15,2016	0				40000
Sep, 15,2017	1	11019.6	1600	9419.6	30580.4
Sep, 15,2018	2	11019.6	1223.22	9796.38	20784.02
Sep, 15,2019	3	11019.6	831.36	10188.24	10595.78
Sep, 15,2020	4	11019.6	423.83	10595.77	0.01
	Total	44078.4	4078.41	39999.99

So. From the above loan amortisation table, we can see that

the total amount that Mr. Antonio will end up paying for the $ 40000 loan received=

$44,078.40

Bill of Exchange
Amount- $ 11019.60			Place, Sep.15,2016
Stamp
Pay on Sep. 15, 2017,to Mr.Don Manuel a sum of $ 11019.60 for loan received
Drawee's name & signature & address			Drawer's name & sign & address
Don Manuel			Don Antonio
Bill of Exchange
Amount- $ 11019.60			Place, Sep.15,2016
Stamp
Pay on Sep. 15, 2018,to Mr.Don Manuel a sum of $ 11019.60 for loan received
Drawee's name & signature & address			Drawer's name & sign & address
Don Manuel			Don Antonio
Bill of Exchange
Amount- $ 11019.60			Place, Sep.15,2016
Stamp
Pay on Sep. 15, 2019,to Mr.Don Manuel a sum of $ 11019.60 for loan received
Drawee's name & signature & address			Drawer's name & sign & address
Don Manuel			Don Antonio
Bill of Exchange
Amount- $ 11019.60			Place, Sep.15,2016
Stamp
Pay on Sep. 15, 2020,to Mr.Don Manuel a sum of $ 11019.60 for loan received
Drawee's name & signature & address			Drawer's name & sign & address
Don Manuel			Don Antonio