Question

A company wants a $3 million loan for a warehouse expansion. The bank will finance 100% of the project with a 5 year balloon and a 20 year amortization. Give a loan structure for both a 5.00% and 5.25% fixed rate. (Specifically, I am looking for help concerning the 5 year balloon)

Answer 1

A 5-year balloon 20-year amortization loan implies that the periodic repayments (either monthly or annually) will be calculated based on the assumption that the loan is repaid over the 20-year amortization period, However, the actual repayments stretch only over 5-years with the outstanding balance being repaid by means of a balloon payment at the end of those 5 years.

(a) Loan = $ 3000000, Interest Rate = 5 % and Applicable Monthly Rate = 5/12 = 0.4167 %, Assumed Loan Tenure = 20 years or (20 x 12) = 240 months

Let the required monthly repayments be $ m

Therefore, 3000000 = m x (1/0.004167) x [1-{1/(1.004167)^(240)}]

3000000 = m x 151.52

m = 3000000 / 151.52 = $ 19799.33

Required Balloon Payment = 19799.33 x (1/0.004167) x [1-{1/(1.004167)^(180)}] = $ 2503663.75

(b) Loan = $ 3000000, Interest Rate = 5.25 % and Applicable Monthly Rate = 5.25 / 12 = 0.4375 %, Assumed Loan Tenure = 20 years or (20 x 12) = 240 months

Let the required monthly repayments be $ n

Therefore, 3000000 = n x (1/0.004375) x [1-{1/(1.004375)^(240)}]

3000000 = n x 148.40

n = 3000000 / 148.40 = $ 20215.32

Required Balloon Payment = 20215.32 x (1/0.004375) x [1-{1/(1.004375)^(180)}] = $ 2514726.38