Question #6

After lunch, Nancy Williams calls up her personal banker to ask about two things. One, she wants a 1-year education loan of $20,000 for her son, Phil and two, she is looking to take out a mortgage loan of $200,000. The banker offers the following choices: 1. Education loan of $20,000: A simple loan to be repaid after a year along with an interest of 10% p.a. or an amortized loan at an interest rate of 10% p.a. to be repaid through 12 equal monthly instalments. 2. Mortgage loan of $200,000: A 9% p.a. loan for 25 years without any discount points or an 8.5% p.a. loan for 25 years with 1 discount point. Nancy decides to go for a simple loan because, well, it is simple instead of being complex. She also decides to avail the discount point facility, assuming that she is unlikely to repay the loan before time.

Question 6 (5 marks) Did Nancy take a correct decision regarding taking a simple loan for her sons education? Support your answer with relevant computations and reasoning. (5 marks)