Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Priya takes out a loan from the Deep Bay Bank for $30,000 to buy a new Prius. The interest rate changed is j26 = 7.54%

Priya takes out a loan from the Deep Bay Bank for $30,000 to buy a new Prius. The interest rate changed is j26 = 7.54% p.a. The loan is to be repaid over 4 years with the first payment due in a fortnights time. The terms of the loan are that it is an interest only loan for the first year (first 26 payments), at which time it converts to a fully amortized P&I loan.

a) Illustrate all the cash flows associated with this scenario as a fully labelled timeline diagram.

b) Determine the size of the fortnightly payments made during the first year.

c) Determine the size of the outstanding principal at the end of the first year.

d) Determine the size of the fortnightly payments during the P&I phase of the loan.

At the same time that Priya takes out the loan for the car, she also takes out a second loan for $10,000 from the Mountain River Bank in order to pay off her credit card debit. The Mountain River Bank change interest at a rate of j12 =10.08% p.a. Priya intends to pay off this loan through payments of $300 per month, starting in a months time, until the loan is paid off.

e) Find the total Priya owes (i.e. across both loans) two years after she took out the loans.

f) Given that most banks (including the Deep Bay Bank and the Mountain River Bank) have similar cost structures and similar investment options, explain a plausible reason why the Deep Bay Bank may have been able to offer a much lower interest rate on the car loan than the Mountain River Bank could for the credit card loan.

g) The Deep Bay Bank charges a fee of $800 to convert the loan from an interest only loan to P&I loan, and this fee is paid at the same time as the first payment on the P&I loan. That is, payment number 27 rather than being R is actually R+800. Determine the j26 interest rate that Priya is effectively paying on the car loan.

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_2

Step: 3

blur-text-image_3

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

Forward Lease Sukuk In Islamic Capital Markets Structure And Governing Rules

Authors: Ahcene Lahsasna , M. Kabir Hassan , Rubi Ahmad

1st Edition

3319942611,331994262X

More Books

Students also viewed these Finance questions

Question

Explain the basic steps involved in process innovation.

Answered: 1 week ago