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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 annual 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). Assume 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. (10 points) | ||
| 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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