Question
Helen is considering taking out a loan of $80,000 to buy an investment property in rural NSW. The details for the loan are as follows:
Helen is considering taking out a loan of $80,000 to buy an investment property in rural NSW. The details for the loan are as follows:
- Repayments will be made on a monthly basis. However, the first repayment will be made exactly THREE months from today
- The loan will be repaid by 240 level repayments
- The interest charged on the loan is currently 6% p.a effective
Using this information, answer the following questions:
a) State clearly the type of effective rate that should be used in an annuity formula for Helen's loan as described above (e.g "effective quarterly rate", "effective weekly rate" etc). Then determine the value of this effective rate (1mark)
b) Draw a cash flow diagram for Helen's loan described above, and then determine the size of the level repayment for Helen's loan (2 marks)
c) If the interest rate charged on Helen's loan was instead 6% p.a compounding monthly, would her repayments be larger or smaller? Justify your answer (1 mark)
Helen's husband, Jake, is also considering buying an investment property, but in Adelaide instead. Jake has calculated that he needs to borrow $450,000 from the bank to fund this purchase. The details for the loan are as follows:
- The repayments for this loan will be made on a FORTNIGHTLY basis, the first payment being exactly 2 weeks from today. Assume there are EXACTLY 26 fortnights per year
- The loan will be repaid over 30 years with level repayments
- The interest charged on the loan is 5% p.a compounding half-yearly
Using this information, answering the following questions:
d) Calculate the effective fortnightly rate for Jake's loan. Give your answer as a percentage to 4 decimal places (1 mark)
e) Draw a cash flow diagram for Jake's loan as described above. Then calculate the size of his level repayment (2 marks)
After speaking with the bank further, Jake has found that there is a different repayment plan available. In this second repayment plan, Jake would make interest-only payments for the first 2 years of the loan, and then level principal-and-interest repayments for the remaining 28 years after that. All other details for the loan remain the same.
f) Draw a cash flow diagram for Jake's loan if he decides to go with this repayment option (1mark)
g) Calculate the size of a single interest-only payment (those made within the first 2 years) and separately the size of a single principle-and-interest repayment (those made within the remaining 28 years)
(2marks)
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