Helens husband, Jake, is also considering buying an investment property, but in Ade- laide instead. Jake has calculated that he needs to borrow $450,000 from the bank to fund this purchase. The details for his 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. For the purposes of this assignment, 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, answer the following questions.

  d) Calculate the effective fortnightly rate for Jakes loan. Give your answer as a percentage to 4 decimal places. (1 mark)

  e) Draw a cash flow diagram for Jakes 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 Jakes loan if he decides to go with this repayment option. (1 mark)

7. g) Calculate the size of a single interest-only payment (those made within the first 2 years) and separately the size of a single principal-and-interest repayment (those made within the remaining 28 years). (2 marks)

8. h) BONUS QUESTION If you do a quick calculation, you will find that this second arrangement will result in Jake paying more total interest to the bank than using the first arrangement. Jake is fully aware of this fact. Give a reason why Jake may still choose this second arrangement, despite the extra interest he would have to pay.