Question
6. Mary wants to borrow $100,000 for the next ten years. She has the following two loan options: (TB) Triple Bank offers a 10 year
6. Mary wants to borrow $100,000 for the next ten years. She has the following two loan options: (TB) Triple Bank offers a 10 year sinking fund loan. Under the sinking fund loan, Mary will pay the interest at the end of each year on the loan. Additionally, Mary will make a (level) deposit into a sinking fund at the end of each year. The deposit into the sinking fund will be such that the amount in the sinking fund will exactly repay the loan at the end of 10 years. The annual effective interest rate on the loan is 8% and the sinking fund pays an annual effective interest rate of 6%. (CB) Couple Bank offers a 10 year amortization loan at an annual effective interest rate of 9%. The loan will be paid with level annual (end-of-year) payments. (a) Calculate the total annual payment (interest payment + sinking fund deposit) at the end of each year if Mary select option (TB). (b) Calculate the annual payment at the end of each year if Mary select option (CB). (c) Which loan should Mary accept? Justify your answer briefly.
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