<p>If you are negotiating it at year 3 then yes it would be the same. Past value does not matter for decision making, if bank makes decision in year 3 then it values option of you paying next 3 payments as agreed upon, or one single lump sum so problem is the same as when there are only 3 years.</p>
<p>Also, you might find formula for annuity: <span class="math-container">$FV= \frac{C}{r}\left(1-\frac{1}{(1+r)^t}\right)$</span> more convenient than laboriously evaluating those sums.</p>

CC BY-SA 4.0
2023-10-08T14:56:08.537Z
2023-10-08T14:56:08.537Z
1muflon1
<p>Consider the following well-known simple exercise :</p>
<blockquote>
<p>You have a loan outstanding. It requires making three annual payments
at the end of the next three years of $1,000 each. Your bank has
offered to allow you to skip making the next two payments in lieu of
making one large payment at the end of the loan’s term in three years.
If the interest rate on the loan is 5%, what final payment will the
bank require you to make so that it is indifferent between the two
forms of payment?</p>
</blockquote>
<p>We just need to compute the future value of the three payments that is : <span class="math-container">$FV=1000\sum_{i=0}^2 (1.05)^i=\\\$3,152.21. $</span></p>
<p>What if the proposition was a bit further in time ? For example suppose we had to make 6 payments of <span class="math-container">$\\\$$</span>1,000 annually over the next 6 years and suppose that at the end of year three (after the 3rd payment), you can renegotiate the loan and make the large payment at the end. Should we still compute the future value starting year 3, meaning that the answer remains the same or should we compute it regarding today's date , i.e <span class="math-container">$FV=1000\sum_{i=4}^6 (1.05)^i=\\\$3,831.88. $</span> ?</p>

<interest-rate><finance><investment>
Future value of a "future" investment
Kilkik
# Future value of a "future" investment

(Asked by: username_0 on 2023-10-08)

Consider the following well-known simple exercise :

> You have a loan outstanding. It requires making three annual payments
> at the end of the next three years of $1,000 each. Your bank has
> offered to allow you to skip making the next two payments in lieu of
> making one large payment at the end of the loan’s term in three years.
> If the interest rate on the loan is 5%, what final payment will the
> bank require you to make so that it is indifferent between the two
> forms of payment?

We just need to compute the future value of the three payments that is : $FV=1000\sum\_{i=0}^2 (1.05)^i=\\\$3,152.21. $

What if the proposition was a bit further in time ? For example suppose we had to make 6 payments of $\\\$$1,000 annually over the next 6 years and suppose that at the end of year three (after the 3rd payment), you can renegotiate the loan and make the large payment at the end. Should we still compute the future value starting year 3, meaning that the answer remains the same or should we compute it regarding today's date , i.e $FV=1000\sum\_{i=4}^6 (1.05)^i=\\\$3,831.88. $ ?

**Tags:** interest-rate, finance, investment


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## 1 answers

### Answer by username_1 on 2023-10-08. Score: 0

If you are negotiating it at year 3 then yes it would be the same. Past value does not matter for decision making, if bank makes decision in year 3 then it values option of you paying next 3 payments as agreed upon, or one single lump sum so problem is the same as when there are only 3 years.

Also, you might find formula for annuity: $FV= \frac{C}{r}\left(1-\frac{1}{(1+r)^t}\right)$ more convenient than laboriously evaluating those sums.


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