Question

Lindsey Inc. loans money to John Kruk Corporation in the amount of $840,800. Lindsey accepts an 8% note due in 7 years with interest payable semiannually. After 2 years (and receipt of interest for 2 years), Lindsey needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of 10% compounded semiannually. What is the amount Lindsey will receive on the sale of the note? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Amount received on sale of note = __________?

Answer 1

Step-1:Calculation of semi annual payment
Semi annual payment	=	Loan amount	/	Present value of annuity of 1
	=	$       8,40,800	/	10.56312
	=	$           79,598
Working:
Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+0.04)^-14)/0.04		i	8%/2	=	0.04
	=	10.56312293		n	7*2	=	14
Step-2:Calculation of amount received on sale of note
Amount received on sale	=	Semi annual payment	*	Present value of annuity of 1
	=	$     79,597.69	*	7.72173
	=	$       6,14,632
Working:
Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+0.05)^-10)/0.05		i	10%/2	=	0.05
	=	7.72173		n	5*2	=	10