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5. You have just taken out a five-year loan from a bank to buy an
engagement ring. The ring costs $5000. You plan to put down $1000 and
borrow $4000. You will need to make annual payments of $1000 at the
end of each
year.
Show the timeline of the loan from your perspective.
How would the timeline differ if you created it from the bank's
perspective?

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Respuesta :

In the initial year, since I plan to put down $1000 and borrow $4000, then the inflow from the bank will be +$4000.

The timeline from my perspective will be:

Year 0

Cash flow +$4000

Year 1

Cash flow -$1000

Year 2

Cash flow -$1000

Year 3

Cash flow -$1000

Year 4

Cash flow -$1000

The timeline from the bank's perspective will be:

Year 0

Cash flow -$4000

Year 1

Cash flow +$1000

Year 2

Cash flow +$1000

Year 3

Cash flow +$1000

Year 4

Cash flow +$1000

I'm conclusion, it should be noted that the net cash flow for the bank in year 0 will be $-4000. This is the amount that was lent out by the bank.

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