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# Assume the borrower can take a two month loan. For a two month loan: A loan of size L is made. k is equal to one plus the interest rate - e., if a...

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?