A company has a choice between a bullet loan and an equivalent amortized loan with a value
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Question:
A company has a choice between a bullet loan and an equivalent amortized loan with a value of $3,750,000. Calculate the repayment cash flows for a five-year loan with a 3.05% pa fixed interest rate bullet loan and the equivalent amortized loan.
Year | Bullet loan repayments | Amortized loan repayments | ||
3.05% | 3.80% | 3.05% | 3.80% | |
1 | ? | ? | ||
2 | ? | ? | ||
3 | ? | ? | ||
4 | ? | ? | ||
5 | ? | ? |
Based on your calculations for the bullet loan repayments and amortized loan repayments, explain why the bank recommends that the amortized loan be taken. If interest rates increased to a 3.80% fixed rate, would that alter the bank's recommendation?
Related Book For
Intermediate Accounting
ISBN: 978-0132162302
1st edition
Authors: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella
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