Today is 1 July 2021. You are looking to purchase an investment property today (after months of research and negotiations). You have spoken to Peter, the loan specialist at Harrison Bank, to negotiate the terms of your mortgage. You and Peter have agreed to the following terms:

• You will borrow $570,000 today in order to purchase your chosen property.
• This mortgage will be repaid by level monthly repayments.
• Your first repayment to the bank will occur exactly 1 month from today, on 1 August 2021, and the final repayment will occur exactly 19 years from today, on 1 July 2040.
• Peter has arranged for an interest rate of 6.7% p.a. effective to be locked in for the life of this loan.

Using the information provided, answer the following questions. It is highly recommended you draw a diagram to represent the given information.

The first monthly repayment occurs on 1 August 2021, and the final monthly repayment occurs on 1 July 2040. How many repayments are there in this arrangement?

In preparation of your tax return, you need to calculate the interest charged on your loan so that you can claim it as a tax deduction. Specifically, you are interested in the financial year ending 30 June 2022.

For the purposes of this question, pretend that the repayment on 1 July 2022 is occurring on 30 June 2022 so that there are 12 repayments made in this financial year.

Further, the subscripts used for loan outstanding are measured in months, e.g. L240 is the loan outstanding after 240 months/20 years.

In order to calculate the interest charged on the loan from 1 July 2021 to 30 June 2022, which value(s) of loan outstanding are needed?

a.

L0, L1, and L12

b.

L0 only

c.

L12 only

d.

L0 and L12

What does the difference L0L12 represent?

a.

None of the other choices are correct

b.

The principal repaid in the first year of the loan.

c.

The principal repaid in the first 12 years of the loan.

d.

The interest paid in the first year of the loan.

What does the product L12i12 represent?

a.

Nothing. This expression is complete nonsense.

b.

The interest component of the 13th repayment.

c.

The interest paid in the second year.

d.

The interest component of the 12th repayment.