Question

QUESTION 1 - Present Value – 20 marks

You have approached your organisation’s bank for a $1,000,000 loan. The bank has advised you that the organization can take a traditional mortgage for 10 years at a fixed rate of 6.5% with monthly payments.

1. What is the monthly payments?
2. What is the APR of this loan?
3. What is the effective interest rate (EAR) of this loan?
4. How much of the first payment is interest?
5. How much of the first payment is principal?
6. Your organization plans to refinance the loan after five years. What will be the loan balance then?
7. How much will the loan payment be if payments are scheduled quarterly rather than monthly?
8. Based on quarterly payments, how much will your organisation owe on this loan after five years?

Answer 1

Answer:

Monthly Payments:

After sactioning the loan amount a lump sum amount will be credited to account and a repayment will be in Equal Monthly Installments (EMI’s). That means repayment of loan will start after moratorium period and repayment will be monthly payment over the term of loan. These EMI includes both Principle and Interest amount.

APR:

APR is actually a cost of fund. It is an annual percentage rate charged for the borrowing. It is expressed in percentage.

Formula for calculation APR is as follows:

APR= ((fees+interest /principle)/n)*365)*100

Where, Interest = Total interest paid over period of loan

                    Principle= Loan amount

                N= Number of days in loan term

Effective Interest Rate(EAR)

EAR means effective annual interest rate is the rate of interest that an Investor can pay in a year after taking into consideration compounding.

EAR= (1+i/n)^n-1

Where, i= started annual interest rate

n= Number of compounding periods

First Payment as Interest and Principle

Montly Emi will be 11,355 in that first installment

Principle= 5,938

Interest= 5,417

Note: As the payment continues Principle portion increases and Interest decreases

Loan Balance after 5 Years

Is 580,329 will be the balance after 5years.

Quarterly payment

If repayment is quarterly then EMI will be 34,195

Loan Balance after 5 Years- Quarterly payment

It will be 579,906