Case attached.

Question to be answered

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

2. Prepare an amortization table for the first 6 months of the traditional 30 year loan. How much of the first payment goes toward principal ?

3How long would it take for Canadian Air to pay off the smart loan, assuming 30-years traditional loan payments ? Why is this shorter than the time needed to pay off the traditional loan ? How much interest would the company save ?

4. Assume Canadian air takes out a bullet loan under the terms described. What are the payment on the loan ?

5. What are the paymets for the interest only loan ?

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

1. What are the monthly payments for 30 year traditional loan ? What are the payments for a 20 year traditional loan ? Monthly payment on a 30 year traditional Loan PV N I/YR FV PMT (20,000,000) 360 0.52% $122,493.80 Monthly payment on a 20 year traditional Loan PV N I/YR FV PMT (20,000,000) 240 0.52% 145,603 2. Prepare an amortization table for the first 6 months of the traditional 30 year loan. How much of the first payment g Period 1 2 3 4 5 6 Beginning balance PMT of Payment 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 The first payment of $904.01 goes towards Principal $122,493.80 $122,493.80 $122,493.80 $122,493.80 $122,493.80 $122,493.80 3 How long would it take for Canadian Air to pay off the smart loan, assuming 30-years traditional loan pay Why is this shorter than the time needed to pay off the traditional loan ? How much interest would The bi-weekly payment is one-half of the 30- year traditional loan payment, Bi- weekly payment = I/YR PV PMT FV N $61,246.90 0.24% (20,000,000) $61,246.90 633.2196588854 Since there are 26 bi weekly periods in a year , the time necessary to pay off the bi-weekly loan will be 1) 2) Bi-weekly payoff 24.35 The bi-weekly payments pay off the loan quicker for two reasons. First, one- half of the payment gets to the bank quicker each month which reduces the inteerst that accrues to each month. Company is actually making 13 full payments each year because 26 bi -weekly periods amounts to 13 monthly payments. How much interest would the company save? 30 year total payments = $44,097,766.37 Bi- weekly total payments = 38,782,739.70 So According to traditional method the saving is the difference between these two amounts. But this calculation is misleading because the present value of the two cash flows at 6.5% is $1,000,000 This can be cleared by taking the EAR of two payments. EAR of the monthly loan is Nom P/YR EFF 6.50% 12 6.70% EAR of the Bi- Weekly loan is Nom P/YR EFF 6.50% 26 6.71% All the above calculations made it clear that actually bi-weekly loan is more expensive with the same APR because there are more compounding periods in a year than this option. 4. Assume Canadian air takes out a bullet loan under the terms described. What are the payment on the lo The loan payment for the first 59 months are the same as te traditional 30- year loan, which is $6,320.68. this loan payment will be made in the 60th month as well, but the company will also make the bullet payment. N I/YR PMT FV PV 300 0.54% -61246.9 0 $9,328,140.44 So the total payments in month 60 will be $9,334,461.12 5. What are the payments for the interest-only loan? Monthly Interest payments 58,333 The company will make these payments for the first 119 months and then repay the principal and interest on the 120th payment. So the 120th payment will be; Last payment 6. 20,058,333 Which loan is the best for the company? Are there any potential risks in this action? The best loan is the interest only loan because it is the lowest interest rate. One risk of the loan is that the company may not pay off the principal, which could mean it may refinance at a higher rate in the future.of course, the rate in the future could be the same, or even lower but there is still a refinancing risk.One way to show that the interest only loan is the better option to consider what happens if the company makes the same payments as it would if took out the traditional 30 year loan .if the company makes these payments , it would pay off the interest only loan in; I/YR 0.29% PV PMT FV N (20,000,000) $61,246.90 1,045.71 or 87.14 or a 20 year traditional loan ? w much of the first payment goes toward principal ? PMT of Interest 103,333.33 103,234.34 103,134.83 103,034.81 102,934.27 102,833.21 Principal $19,160.46 $19,259.46 $19,358.97 $19,458.99 $19,559.52 $19,660.58 Ending Balance 19,980,839.54 19,961,580.08 19,942,221.11 19,922,762.13 19,903,202.60 19,883,542.02 0-years traditional loan payments ? ? How much interest would the company save ? periods Years hich reduces the i -weekly periods n these two amounts. cash flows t are the payment on the loan ? 30- year loan, as well, but the hen repay the in this action? e rate in the future e way to show that the ompany makes the e company months Years