Mark Sexton and Todd Story, the owners of S&S Air, Inc., were impressed by the work Chris

had done on financial planning. Using Chris$$s analysis, and looking at the demand for light

aircraft, they have decided that their existing fabrication equipment is sufficient, but it is time

to acquire a bigger manufacturing facility. Mark and Todd have identified a suitable structure

that is currently for sale, and they believe they can buy and refurbish it for about $$35$ million.

Mark, Todd, and Chris are now ready to meet with Christie Vaughan, the loan officer for First

United National Bank. The meeting is to discuss the mortgage options available to the

company to finance the new facility.

Christie begins the meeting by discussing a $30-$year mortgage. The loan would be repaid in

equal monthly installments. Because of the previous relationship between S&S Air and the

bank, there would be no closing costs for the loan. Christie states that the APR of the loan

would be $6\mathrm{.}1$ percent. Todd asks if a shorter mortgage loan is available. Christie says that the

bank does have a $20-$year mortgage available at the same APR. Mark decides to ask Christie about a $$smart loan$$ he discussed with a mortgage broker when

he was refinancing his home loan. A smart loan works as follows: Every two weeks a mortgage

payment is made that is exactly one$-$half of the traditional monthly mortgage payment.

Christie informs him that the bank does have smart loans. The APR of the smart loan would

be the same as the APR of the traditional loan. Mark nods his head. He then states this is the

best mortgage option available to the company since it saves interest payments.

Christie agrees with Mark, but then suggests that a bullet loan, or balloon payment, would

result in the greatest interest savings. At Todd$$s prompting, she goes on to explain a bullet

loan. The monthly payments of a bullet loan would be calculated using a $30-$year traditional

mortgage. In this case, there would be a $5-$year bullet. This would mean that the company

would make the mortgage payments for the traditional $30-$year mortgage for the first five

years, but immediately after the company makes the $60$th payment, the bullet payment

would be due. The bullet payment is the remaining principal of the loan. Chris then asks how

the bullet payment is calculated. Christie tells him that the remaining principal can be

calculated using an amortization table, but it is also the present value of the remaining $25$

years of mortgage payments for the $30-$year mortgage.

Todd has also heard of an interest$-$only loan and asks if this loan is available and what the

terms would be$.$ Christie says that the bank offers an interest$-$only loan with a term of $10$

years and an APR of $3\mathrm{.}5$ percent. She goes on to further explain the terms. The company would

be responsible for making interest payments each month on the amount borrowed. No

principal payments are required. At the end of the $10-$year term, the company would repay

the $$35$ million. However, the company can make principal payments at any time. The

principal payments would work just like those on a traditional mortgage. Principal payments

would reduce the principal of the loan and reduce the interest due on the next payment.

Mark and Todd are satisfied with Christie$$s answers, but they are still unsure of which loan

they should choose. They have asked Chris to answer the following questions to help them

choose the correct mortgage. What are the monthly payments for a $30-$year traditional mortgage? What are the

payments for a $20-$year traditional mortgage?

$$ Prepare an amortization table for the first six months of the traditional $30-$year

mortgage. How much of the first payment goes toward principal?

$$ How long would it take for S&S Air to pay off the smart loan assuming $30-$year

traditional mortgage payments? Why is this shorter than the time needed to pay off

the traditional mortgage? How much interest would the company save?

$$ Assume S&S Air takes out a bullet loan under the terms described. What are the

payments on the loan?

$$ What are the payments for the interest$-$only loan?

$$ Which mortgage is the best for the company? Are there any potential risks in this

action?