Question

As a small software developer firm, you have approached the AXZ Bank to obtain a term loan so that the firm can purchase a new server. The AXZ bank provides two (2) offers to your company, as listed below: a) a loan of $100,000 over a five (5) year period at an interest rate of 7.65% per annum (per year) payable at the end of each month. b) a loan of $100, 000 over a three (3) year period at an interest rate of 5.5% per annum (per year) payable at the end of each month. Requirements 1. Calculate the monthly loan instalments for each offer listed above – a) and b). 2. Calculate the total interest payments for each offer listed above – a) and b).

Answer 1

A

First option;:

Loan amount (PV)= 100000

Monthly rate (I)= 7.65%/12= 0.006375

Total months (n)= 5*12= 60

equal or annuity Payment formula = PV* i *((1+i)^n)/((1+i)^n-1)

100000*0.006375*((1+0.006375)^60)/(((1+0.006375)^60)-1)

=2010.930445

Monthly Payment would be $2010.93 in first option

Second option;:

Loan amount (PV)= 100000

Monthly rate (I)= 5.5%/12= 0.004583333333

Total months (n)= 3*12= 36

equal or annuity Payment formula = PV* i *((1+i)^n)/((1+i)^n-1)

100000*0.004583333333*((1+0.004583333333)^36)/(((1+0.004583333333)^36)-1)

=3019.59018

Monthly Payment would be $3019.59 in Second option.

B.

Interest paid under first option = (Monthly Payment * Number of Payment)-loan Amount

=(2010.93*60)-100000

=20655.8

Total ínterest Payment for a is 20655.8

Interest paid under second option = (Monthly Payment * Number of Payment)-loan Amount

=(3019.59*36)-100000

=8705.24

=Total ínterest Payment for b is 8705.24