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In: Finance

Brooks Bright (BB) has applied for a loan of $800,000 to purchase a residential house from...

Brooks Bright (BB) has applied for a loan of $800,000 to purchase a residential house from Distonic Bank. BB has the option of either paying the loan on a flat fixed rated interest or floating rate based on the declining balance of the loan. On the flat fixed interest rate pricing, Distonic Bank will charge a rate of 5 % per annum. The pricing on the floating rate based on the declining balance will be Base Lending Rate (BLR) plus 1.0 % per annum. The Base Lending Rate is currently at 4.0 % per annum. The loan is to be repaid in 20 years. Based on the information provided above, answer the following questions:

(a) Calculate the monthly loan installments if BB opts for the flat fixed rate loan.

(b) Calculate the monthly loan installments if BB opts for the floating rate loan.

(c) Calculate the difference in the total loan amount repaid between the two interest structures (a) and (b). Which of the pricing structure would be beneficial to BB?

Solutions

Expert Solution

a. The monthly loan installments if BB opts for the flat fixed rate loan = $6,666.67

Under Flat fixed rate loan,interest is calculated for the whole of principal amount through-out the loan duration.

(b) The monthly loan installments if BB opts for the floating rate loan = $5,279.65

(c) The difference in the total loan amount repaid between the two interest structures (a) and (b) = $332,884.98

Total repayment of Flat Fixed Interest Rate Loan is $1,600,000 and that of Floating Interest Rate Loan is $1,267,115.02.

Since the total loan amount repaid under Floating Interest Rate Loan is lower by $332,884.98, Floating Interest Rate Loan will be beneficial to BB.

jeff jeffy answered 2 years ago
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