Assumetheborrowercantakeatwomonthloan.Foratwomonthloan:
• AloanofsizeL ismade.
• k isequal tooneplustheinterestrate – e.g.,ifa loancharges5%monthlyinterest,thenk =1.05.
• FirstmonthinterestiscalculatedonthetotalamountL usingthemonthlyinterestrate.
• Thefirstrepaymentissubtractedfromthetotalrepaymentburden(includingfirstmonthinterest) inthefirstmonth.
• Secondmonthinterest(againusingthemonthlyrate)iscalculatedonwhat’sleftoftheloanand interestAFTERthefirstpayment.
• Thesecondrepaymentshouldequalwhateverislefttoberepaid(includingsecondmonthinterest) inthesecondmonth.
5. Assumetheborrowerrepaysthesameamount m inbothmonths.Expressthepaymentamount m intermsofLandk.
6. Underthesamesetup,whatisthelargestm thattheborrowercanaffordtopaybackeach month?
