Question

In: Finance

Jacky takes out a 5-year personal loan from the bank today. Jacky will make 10 equal half-yearly repayments including the principal and the interest (P&I)

Jacky takes out a 5-year personal loan from the bank today. Jacky will make 10 equal half-yearly repayments including the principal and the interest (P&I) starting in 6 months. The interest rate is 7% p.a. compounded half-yearly. Which of the following would help Jacky reduce the total repayment? 

A. Make 60 equal monthly P&I repayments starting in 1 month.

B. Make a single repayment at the end of year 5.

C. Repay interest only for the first 2 years and repay P&I for the following 3 years.

D. Make 5 equal yearly P&I repayments starting in 1 year.

Solutions

Expert Solution

The right option is (A).

Explanation:

In any amortized loan repayment , the earlier the loan is repaid, the total amount repaid will be smaller and would be reduced. 

Hence Option D) is incorrect as there are 5 equal payments.

Options B is incorrect as the outstanding balance is kept for 5 years without any repayment in between.

Option C is also incorrect as the principal outstanding is not reduced for the first 2 years

 

Answer is A. Make 60 equal monthly P&I repayments starting in 1 month.

Answer is A. Make 60 equal monthly P&I repayments starting in 1 month.

Junaid answered 1 year ago
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