below is th case with the questions and the answers for teh case study. I Just need to add an introduction to the memo and an ending as well. once i have the intro and teh ending I will add teh question and answers.

CHAPTER CASE

S&S AIRS MORTGAGE

Mark Sexton and Todd Story, the owners of S&S Air, Inc., were impressed by the work Chris had done on financial planning. Using Chriss analysis, and looking at the demand for light aircraft, they have decided that their existing fabrication equipment is sufficient, but it is time to acquire a bigger manufacturing facility. Mark and Todd have identified a suitable structure that is currently for sale, and they believe they can buy and refurbish it for about $35 million. Mark, Todd, and Chris are now ready to meet with Christie Vaughan, the loan officer for First United National Bank. The meeting is to discuss the mortgage options available to the company to finance the new facility.

Christie begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly installments. Because of the previous relationship between S&S Air and the bank, there would be no closing costs for the loan. Christie states that the APR of the loan would be 6.1 percent. Todd asks if a shorter mortgage loan is available. Christie says that the bank does have a 20-year mortgage available at the same APR.

Mark decides to ask Christie about a smart loan he discussed with a mortgage broker when he was refinancing his home loan. A smart loan works as follows: Every two weeks a mortgage payment is made that is exactly one-half of the traditional monthly mortgage payment. Christie informs him that the bank does have smart loans. The APR of the smart loan would be the same as the APR of the traditional loan. Mark nods his head. He then states this is the best mortgage option available to the company since it saves interest payments.

Christie agrees with Mark, but then suggests that a bullet loan, or balloon payment, would result in the greatest interest savings. At Todds prompting, she goes on to explain a bullet loan. The monthly payments of a bullet loan would be calculated using a 30-year traditional mortgage. In this case, there would be a 5-year bullet. This would mean that the company would make the mortgage payments for the traditional 30-year mortgage for the first five years, but immediately after the company makes the 60th payment, the bullet payment would be due. The bullet payment is the remaining principal of the loan. Chris then asks how the bullet payment is calculated. Christie tells him that the remaining principal can be calculated using an amortization table, but it is also the present value of the remaining 25 years of mortgage payments for the 30-year mortgage.

Todd has also heard of an interest-only loan and asks if this loan is available and what the terms would be. Christie says that the bank offers an interest-only loan with a term of 10 years and an APR of 3.5 percent. She goes on to further explain the terms. The company would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the 10-year term, the company would repay the $35 million. However, the company can make principal payments at any time. The principal payments would work just like those on a traditional mortgage. Principal payments would reduce the principal of the loan and reduce the interest due on the next payment.

Mark and Todd are satisfied with Christies answers, but they are still unsure of which loan they should choose. They have asked Chris to answer the following questions to help them choose the correct mortgage.

QUESTIONS

1. What are the monthly payments for a 30-year traditional mortgage? What are the payments for a 20-year traditional mortgage?

2. Prepare an amortization table for the first six months of the traditional 30-year mortgage. How much of the first payment goes toward principal?

3. How long would it take for S&S Air to pay off the smart loan assuming 30-year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save?

4. Assume S&S Air takes out a bullet loan under the terms described. What are the payments on the loan?

5. What are the payments for the interest-only loan?

6. Which mortgage is the best for the company? Are there any potential risks in this action?

_______________________________________________________________________

Week 4 Case

1. What are the monthly payments for a 30-year traditional mortgage? What are the payments for a 20-year traditional mortgage?

Traditional mortgage, also known as conventional mortgage is a loan that carries a fixed interest rate. Generally a down payment of 20% is made by loan seeker and remaining 80% is paid by the loan provider.

The monthly repayment for loan with equal payments is the annuity payment with the loan value as the PV of the annuity. In the given case, if the loan is taken for 30 years, the number of payments or installments will be 360 (30*12). Monthly payments to be made by S&S Air for 360 months are calculated hereunder by using the present value formula:

PVA = C[1-1/(1+r)^360/r]

$35,000,000 = C[1-1/(1+0.061)^360/(0.061/12)]

$35,000,000 = C[165.0179216]

165.0179216 165.0179216

C = $212,098.1749

C = $212,098.17

S&S Air will have to make a monthly repayment $212,098.17 for 30 years.

If S&S Air goes for a loan period of 20 years then the monthly payments for 240 months (20*12) will be as under:

PVA = C[1-1/(1+r)^240/r]

$35,000,000 = C[1-1/(1+0.061)^240/(0.061/12)]

$35,000,000 = C[138.4634858]

138.4634858138.4634858

C = $252,774.2227

C = $252,774.22

S&S Air will have to make a monthly repayment $252,774.22 for 20 years.

2. Prepare an amortization table for the first six months of the traditional 30-year mortgage. How much of the first payment goes toward principal?

Amortization refers to the process of payment of a loan through regular payments. Amortization table provides detail of each periodic payment on a mortgage loan. It gives an overview of the monthly payment by splitting it into interest and principal amount. In initial installments the payment towards interest is high whereas towards the principal amount is low. Further the payment towards principal keeps on increasing and payment towards interest goes on declining. The amortization table for first 6 months is given under.

Amortization Table
Principal Value		$ 350,00,000.00
Annual Interest Rate		6.10%
Years		30
Month per Year		12
Monthly Payment		$ 2,12,098.17
Total Amount of Loan		$ 763,55,342.98
Interest		$ 413,55,342.98
Month	Beginning Balance	Monthly Payment	Monthly Interest	Monthly Principal	Ending Balance
1	$350,00,000.00	$ 2,12,098.17	$1,77,916.67	$34,181.51	$349,65,818.49
2	$349,65,818.49	$ 2,12,098.17	$1,77,742.91	$34,355.26	$349,31,463.23
3	$349,31,463.23	$ 2,12,098.17	$1,77,568.27	$34,529.90	$348,96,933.32
4	$348,96,933.32	$ 2,12,098.17	$1,77,392.74	$34,705.43	$348,62,227.89
5	$348,62,227.89	$ 2,12,098.17	$1,77,216.33	$34,881.85	$348,27,346.04
6	$348,27,346.04	$ 2,12,098.17	$,77,039.01	$35,059.17	$347,92,286.88

As shown in amortization schedule an amount of $34,181.51 goes towards principal in the first payment. In initial six months the company makes a payment of $1,272,589.05 out of which only $207,713.12 goes towards principal amount and $1,064,875.93 goes towards interest. The outstanding balance at the end of six months is $34,792,286.88.

3. How long would it take for S&S Air to pay off the smart loan assuming 30-year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save?

If Mark and Todd opt for smart loan then they will be allowed to make bi-weekly payments. The bi-weekly payments will reduce the time period of the loan as well as the interest element. The calculation of time and interest are given under:

Bi-weekly payment will be half of the 30 year traditional mortgage payment. Therefore, the bi-weekly payment will be:

Bi-weekly Payment = $212,098.17/2

= $106,049.085

It is important to note that if S&S Air makes monthly payments then the number of installments will be 12 whereas if it is making bi-weekly payments then the number of payments in a year will increase to 26. It means that the company will be making 2 extra payments every year.

No of weeks in a year = 365/7

= 52 Weeks a year.

No. of payments in a year = 52/2

= 26 Payments per year.

The bi-weekly payment for 30 year mortgage loan is calculated using NPER function of MSEXCEL as under:

Therefore, to make payment of 30 year mortgage loan of $35 million by way of bi-weekly installments a total number of 635.2355 installments will be made. To calculate the number of years required to pay off the entire loan amount the total number of installments will be divided by 26.

No. of Years = 635.2355/26

= 24.423 Years

Savings in Interest

If the company makes bi-weekly payments then it will be able to save $9,014,014.92 (41,355,342.98 32,341,328.06) in interest. The saving in interest is difference between interest of amortization table of traditional mortgage and amortization table of bi-weekly payment.

Amortization Table of Bi-weekly Payment
Principal Value		$ 350,00,000.00
Annual Interest Rate		6.10%
Years		24.42313462
Month per Year		26
Monthly Payment		$ 1,06,049.09
Total Amount of Loan		$ 673,41,328.06
Interest		$ 323,41,328.06
Month	Beginning Balance	Payment	Interest	Principal	Ending Balance
1	$ 350,00,000.00	$ 1,06,049.09	$ 82,115.38	$ 23,933.70	$ 349,76,066.30
2	$ 349,76,066.30	$ 1,06,049.09	$ 82,059.23	$ 23,989.85	$ 349,52,076.45
3	$ 349,52,076.45	$ 1,06,049.09	$ 82,002.95	$ 24,046.14	$ 349,28,030.31
4	$ 349,28,030.31	$ 1,06,049.09	$ 81,946.53	$ 24,102.55	$ 349,03,927.76
5	$ 349,03,927.76	$ 1,06,049.09	$ 81,889.98	$ 24,159.10	$ 348,79,768.66
6	$ 348,79,768.66	$ 1,06,049.09	$ 81,833.30	$ 24,215.78	$ 348,55,552.88

4. Assume S&S Air takes out a bullet loan under the terms described. What are the payments on the loan?

As explained by Christie the payment of bullet loan will be similar to that of traditional mortgage loan for first five years. It means the payment will be done in 60 installments. In the first 59 installments the payment will be same as 30 year traditional mortgage but the 60^th installment will include the installment amount as well as the remaining balance.

The enclosed 30 year traditional amortization table shows that the balance after the payment of 60^th installment will be $32,609,016.11. This is the amount that will also be paid along with the amount of installment. Therefore, the total amount payable at the end of 60^th month will be as under:

Total Amount Payable = $32,609,016.11 + 212,098.17

= $32,821,114.28

5. What are the payments for the interest-only loan?

The interest only loan is a form of loan in which only the interest portion is paid. As explained by Christine it is offered at an interest rate of 3.5% for the period of 10 years. In the last installment the principal amount is paid along with the amount of interest. The total number of installments will be 120 (10*12). Only interest portion will be paid in the first 119 installments and in 120^th installment the principal amount will be paid with interest.

Monthly Interest Payment = 35,000,000*(3.5/12)

Monthly Interest Payment for first 119 installments 102,083.33

Payment in 120^th installment = $35,000,000 + 102,083.33

= $35,102,083.33

6. Which mortgage is the best for the company? Are there any potential risks in this action?

The best loan for S&S Air is interest only loan as the APR is lowest in it. It is a loan in which they will pay least amount. The only risk with loan is that the company will be required to pay a huge amount in last installment. In case if the company fails to pay the amount of last installment then they will have to refinance their loan at high interest rate. So it is advisable for the company to make a reserve from the beginning for the final payment of $35,000,000 at the end of 10 years.

To show that the interest only loan is best option for the company let us consider what happens if the company takes a 30 year traditional mortgage loan the APR of interest only loan and makes payment like interest only loan. The calculation is done by using NPER function of MSEXCEL.

The period to make the payment in form of interest only loan will be 225.39 which means 18.7825 years (225.39/12).

If the company makes payment like traditional mortgage loan at the interest rates of interest only loan then it will take 18.7825 years to pay of the complete loan which will result in much interest.