S&S Air's Mortgage

Maln objectives

To caloulate loan amortization payments

To apply financial repayment techniques.

To apply the concept of how laans are amortized or paid off.

Description of the activity and instructions

Mark Sexton and Todd Story, the owners of $$85$ Air, Inc, were impressed by the work chris

had done on flnancial planning. Using Chrik's analysak, 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 faclity$-$Mark and Tadd have identified a suitable structure

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

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

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

compary to finance the new faclity$-$

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

equal monthly installments. Because of the previous relationship between S&$5$ Air and the

bank, there would be no clasing 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 avalable. Christie says that the

bank does have a $20-$year mortgage avalable at the same APR.

Mark decides to ask Christie about a "smart loan" he discussed with a mortgage braker 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 Sim that the bank does have smart loarc. 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 martgage option avallable to the company since it saves interest payments.

Chriktic 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

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

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

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

years, but immediately after the compary males the $6$oth 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. cherstie 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$-$colly 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 wauld

be responalble for maling interest payments each month on the amaunt 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 amy time. The

principal payments would work just Ike thase on a traditional mortgage. Principal payments

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

Mark and Todd are satified with cherstie'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.

Questians:

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. Haw much of the first payment goes toward prindipal?

How lang would it take for $585$ 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 compary save?

Assume $585$ Air tales out a bullet laan under the terms described. What are the

payments on the loan?

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

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

action?

Suppart your condusion with at least two scholarly references using MIU online

library$-$

Use APA $7$ for citations in$-$teat and reference page.

Maximum length and format

$6$ pages, This wark must be submitted in editable format $(.$doc, doos, adf rtf$).$ Scanned

images of the exercise and $.$pdf format will not be accepted. Excel calculations are to be lirked

to the dacument.