Question
Suppose a bank is offering you two different types of loans. Loan A is an amortized loan (equal term payment) over 10 years, with a
Suppose a bank is offering you two different types of loans. Loan A is an amortized loan (equal term payment) over 10 years, with a fixed monthly payment. Loan B is not amortized, but rather requires payment of the interest at the end of the loan when you repay the principal (i.e., a 10-year bullet loan). Assuming the initial loan is $250,000, the interest rate on both loans is APR=8%, monthly compounding. a. Make two amortization tables for the two loans. b. In which loan arrangement do you pay the most interest, in terms of the present value of the interest? c. In which loan arrangement do you pay the most principal, in terms of the present value of the principal repayments? d) In which loan arrangement do you pay the most principal, in terms of the present value of the principal repayments? e) Which loan is better and why?
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