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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,

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?

The interest rate for the loan is 6.7% p.a. effective. Calculate the equivalent nominal annual rate compounding monthly. Give your answer as a percentage to 4 decimal places, and do NOT include a percentage sign.

Calculate the equivalent effective monthly rate. Give your answer as a percentage to 4 decimal places, and do NOT include a percentage sign

Calculate the size of the level monthly repayment needed in order to fully repay the loan by 1 July 2040. Give your answer to the nearest cent, and do NOT include a dollar sign.

Determine the value of L12. Give your answer to the nearest cent, and do NOT include a dollar sign.

The interest rate for the loan is 6.7% p.a. effective. Which of the following is the best next step before trying to calculate the required monthly repayment for the mortgage?

a.

Convert the 6.7% to an effective monthly rate, and use this rate directly to calculate the monthly repayments.

b.

No interest rate conversion is needed. The 6.7% can be used directly.

c.

Divide 6.7% by 12 to work in months

d.

Convert the 6.7% to a nominal annual rate compounding monthly, and use this new rate directly to calculate the monthly repayments.

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