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Brooks Bright (BB) has applied for a loan of $800,000 to purchase a residential house from Distonic Bank. BB has the option of either paying
- Brooks Bright (BB) has applied for a loan of $800,000 to purchase a residential house from Distonic Bank. BB has the option of either paying the loan on a flat fixed rated interest or floating rate based on the declining balance of the loan. On the flat fixed interest rate pricing, Distonic Bank will charge a rate of 5 % per annum. The pricing on the floating rate based on the declining balance will be Base Lending Rate (BLR) plus 1.0 % per annum. The Base Lending Rate is currently at 4.0 % per annum. The loan is to be repaid in 20 years. Based on the information provided above, answer the following questions:
- Calculate the monthly loan installments if BB opts for the flat fixed rate loan.
- Calculate the monthly loan installments if BB opts for the floating rate loan.
- Calculate the difference in the total loan amount repaid between the two interest structures (a) and (b). Which of the pricing structure would be beneficial to BB?
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- The current covid-19 pandemic is causing market interest rates to fall. How would it affect BB, if the loan is based on (i) a flat fixed rate (ii) floating rate?
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