A seller has offered you a $1,000,000 interest-only 5 year loan at 6% (annual payments), when...

A seller has offered you a $1,000,000 interest-only 5 year loan at 6% (annual payments), when market interest rates on such loans are 8% (also interest only). Basing your decision on market values (discount using market rate), how much more should you be willing to pay for the property than you otherwise think it is worth, due to the financing offer?

A. Zero, by definition.

B. $26,497

C. $79,854

D. $98,412

Solutions

Expert Solution

The more that could be paid will be equal to the present value of value of less interest paid over the life of the loan

Difference in interest amount = 1,000,000*(8%-6%)

= $20,000

Present value of savings = 20,000*PVAF(8%, 5 years)

= 20,000*3.99271

=$79,854

Hence, the answer is c.

jeff jeffy answered 2 years ago

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