Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Jerry is considering taking out a loan of $100,000 to make an investment. The details for the loan are as follows: Repayments will be

"

Jerry is considering taking out a loan of $100,000 to make an investment. The details for the loan are as follows:

Repayments will be made on a half-yearly basis. However, the first repayment will be made exactly THREE months from today.

The loan will be repaid by 10 level repayments

The interest charged on the loan is 6% p.a. compounding monthly

Using this information, answer the following questions.

a) Let rq denote the equivalent effective quarterly (i.e. a 3-month period) rate charged on Jerrys loan. Write down an equation that can be solved to obtain the effective quarterly rate (your equation should involve rq). You do NOT need to solve this equation. (1 mark)

b) Explain whether or not we should use the interest rate rq in an annuity formula when working with Jerrys loan. (1 mark)

c) State clearly the type of effective rate that should be used in an annuity formula for Jerrys loan as described above (e.g. effective monthly rate, effective weekly rate). Then determine the value of this effective rate. Express your answer as a percentage to 4 decimal places. (1 mark)

d) Draw a cash flow diagram, and then determine the size of the level repayment for Jerrys loan. (2 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Routledge International Handbook Of Financialization

Authors: Philip Mader, Daniel Mertens, Natascha Van Der Zwan

1st Edition

1138308218, 978-1138308213

More Books

Students also viewed these Finance questions