The recently released recommendations of the Banking Royal Commission (the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry) include the elimination of commission pay- ments to mortgage brokers Returning to the details of question 3 above: Theresa was Bill's mortgage broker. Bill's bank will pay her commission amounts of $1 000 annually from 19 March 2020 through to 19 March 2049 (inclusive) If we view the bank's mortgage business as making neither a profit nor a loss, then (in the absence of any internal capital transfers) Theresa's com- mission payments have to effectively come from Bill. a. [4 marks] As at 19 March 2019, what is the total value of Theresa's commission (use a valuation interest rate of 3.5% p.a.)? Your answer needs to be supported by a cash flow diagram (from Theresa's perspective), a valuation date and an equation of value If the value of Theresa's commission comes from Bill, then the total amount of Bill's loan is $600 000 plus your answer to part a above. But Bill's pay- ments are only of an amount calculated by you in parts b and d of question 3 above. This suggests that the effective interest rate the bank requires on its funds is not the 3.5% p.a. that it communicates publicly b. 4 marks Is the effective interest rate that bank requires on its funds higher or lower than the 3.5% p.a. that it communicates publicly? Why? (Answer this last part by reference to an appropriate equation of value and cash flow diagram. No numerical calculations are required.) c. 8 marks Calculate the effective interest rate discussed in part hb above. Carefully explain how you reached your answer d. [4 marksIf B had been offered the effective rate discussed in part b above, by how much would his annual payments increase or decrease? The recently released recommendations of the Banking Royal Commission (the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry) include the elimination of commission pay- ments to mortgage brokers Returning to the details of question 3 above: Theresa was Bill's mortgage broker. Bill's bank will pay her commission amounts of $1 000 annually from 19 March 2020 through to 19 March 2049 (inclusive) If we view the bank's mortgage business as making neither a profit nor a loss, then (in the absence of any internal capital transfers) Theresa's com- mission payments have to effectively come from Bill. a. [4 marks] As at 19 March 2019, what is the total value of Theresa's commission (use a valuation interest rate of 3.5% p.a.)? Your answer needs to be supported by a cash flow diagram (from Theresa's perspective), a valuation date and an equation of value If the value of Theresa's commission comes from Bill, then the total amount of Bill's loan is $600 000 plus your answer to part a above. But Bill's pay- ments are only of an amount calculated by you in parts b and d of question 3 above. This suggests that the effective interest rate the bank requires on its funds is not the 3.5% p.a. that it communicates publicly b. 4 marks Is the effective interest rate that bank requires on its funds higher or lower than the 3.5% p.a. that it communicates publicly? Why? (Answer this last part by reference to an appropriate equation of value and cash flow diagram. No numerical calculations are required.) c. 8 marks Calculate the effective interest rate discussed in part hb above. Carefully explain how you reached your answer d. [4 marksIf B had been offered the effective rate discussed in part b above, by how much would his annual payments increase or decrease
