Cindy is looking to get a better return on her money and generate more cash flow than she currently gets at the bank. She currently has $100,000 that she has in a CD in the bank. Right now that CD is giving her a return 1% interest per year. Cindy decides that she wants to start lending her money out and finds an opportunity to lend money (most importantly that is secured with good collateral!!) at 8% interest per year. The loan is for 12 months. The loan will have monthly payments that are interest only, so Cindy will receive the full $100,000 back at the end of the 12 months. What are the monthly payments that Cindy will receive?
Answer: (these are the numbers to enter into your Hewlett Packard 10bii calculator)
N = 12
I = 8
PV = ($100,000) (this is entered into the calculator as negative as the money is "leaving" her pocket as it is lent out)
PMT = ?? (this is what we are solving)
FV = $100,000 (this number is entered into the calculator as positive as the money is "returning" to Cindy's pocket)
After entering this number into the calculator, and hitting PMT, the monthly payments are $666.67. Side note: if the N is 12 or 100 or 360, the PMT will not change as the loan is interest only.