Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 1 (20 marks) You are considering taking out an $800,000 30-year loan with equal monthly payments with a bank, which quotes annual rates on

Question 1 (20 marks)

You are considering taking out an $800,000 30-year loan with equal monthly payments with a bank, which quotes annual rates on its deposits and loans of 1.2% and 3.6%, respectively.

(a) Without constructing a loan amortization schedule,

(i) calculate the amount of interest that will be paid in the first month of the 25th year into the loan. (5 marks)

(ii) calculate the total amount of interest that will be paid over the life of the loan. (3 marks)

(b) Interpret your answer for (a)(ii) and discuss the limitation(s), if any, of such an interpretation. (3 marks)

(c) Calculate the present value of the loan payments using a discount rate of 1.2%. (2 marks)

(d) Interpret your answer for (c) as well as the difference between that answer and the actual loan principal. What can explain this difference? (7 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

Financial Modeling

Authors: Simon Benninga

4th Edition

0262027283, 9780262027281

More Books

Students also viewed these Finance questions

Question

How many paths between E and F, no backtracking allowed.

Answered: 1 week ago