Question
A company has a choice between a bullet loan and an equivalent amortized loan with a value of $3,500,000. Calculate the repayment cash flows for
A company has a choice between a bullet loan and an equivalent amortized loan with a value of $3,500,000. Calculate the repayment cash flows for a four-year loan with 3.15% pa fixed interest rate bullet loan and the equivalent amortized loan.
| Year | Bullet loan repayments | Amortized loan repayments | ||
| 3.15% | 2.35% | 3.15% | 2.35% | |
| 1 | ? | ? | ||
| 2 | ? | ? | ||
| 3 | ? | ? | ||
| 4 | ? | ? |
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 fell to 2.35% fixed rate, would that alter the bank's recommendation?
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Analysis for Financial Management
Authors: Robert Higgins
11th edition
77861787, 978-0077861780
