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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...
• 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?