QUESTION 6

Assume that Karl has obtained a variable rate (adjustable rate) loan from ABN-Amro in the Netherlands. The loan amount is 700,000 euros, at an annual interest rate of LIBOR +1%. The payments are made monthly and the term of the loan is for 20 years (240 months). The loan adjusts at the beginning of each year for 20 years. Assume that LIBOR+1% is equal to 2.4% for year 1 and 3.6% for year 2.

a. Determine the monthly payment for year 1 (3 points)

b. Determine the loan balance at end of the first year (3 points)

c. Determine the monthly payment for year 2 (4 points)