Question

Tolden Trading has borrowed from MacBank to invest in a project. The loan requires a repayment of $17,384 at the end of every month for three years. The lender quoted Tolden Trading a rate of 8.40 per cent with monthly compounding.

Required:

Assuming the MacBank figures are correct;

(1) What is the approximate amount of the loan taken out by Tolden Trading?

(2) What is the approximate overall effective annual rate on the loan if Tolden Trading also was required to pay an initial fee to the mortgage broker who introduced the business to the financier. The fee was payable on establishment of the loan and was an amount equal to 6% of the sum of the first 2 loan repayments.

Answer 1

(1) What is the approximate amount of the loan taken out by Tolden Trading? $551501.48

(2) What is the approximate overall effective annual rate on the loan if Tolden Trading also was required to pay an initial fee to the mortgage broker who introduced the business to the financier. The fee was payable on establishment of the loan and was an amount equal to 6% of the sum of the first 2 loan repayments.

Fee Paid = Loan Repayment * 2 * 6%

Fee Paid = 17384 * 2 * 6%

Fee Paid = $2086.08

Net Loan Amount = Loan Amount Received - Fee Paid = 551501.48 - 2086.08 = $549415.40

Computation of Monthly Interest Rate: 0.72%

Effective Annual interest Rate = (1 + Monthly Interest Rate)^12 - 1

Effective Annual interest Rate = (1 + 0.72%)^12 - 1

Effective Annual interest Rate = 1.0901 - 1

Effective Annual interest Rate = 9.01%

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