Pls do not handwrite the answer, this is for easy reading QUESTION 1:- You are c
ID: 2808962 • Letter: P
Question
Pls do not handwrite the answer, this is for easy reading
QUESTION 1:-
You are considering taking out an $800,00 30year loan with equal monthly payments with a bank, which quotes annual rate on its deposits and loans of 1.2% and 3.6%, respectively.
a) Without constructing a loan amortization schedule,
i) calculate the amount of interest that will be paid in the first month of the 25th year into the loan
ii) calculate the total amount of interest that will be paid over the life of the loan.
iii) Interpret your answer for a(ii) and discuss the limitation(s), if any, of such an interpretation.
iv) Calculate the present value of the loan payments using a discount rate of 1.2%.
v) Interpret your answer for (iv) as well as the difference between that answer and the actual loan principal. What can explain this difference?
Explanation / Answer
1) PV= 80000, N= 360, I= 3.6% fv= 0, pmt=?
Using a financial calculator, pmt= 2880$
2) ((2880*360)-80000))=956800 $
3) The interest paid is nearly 12 times as that of the principal!! however the limitation of this interpretation is :
Inflation not considered.
the possible profit which could have been made by investing the 80000 $ bprrowed elsewhere which could supersede the interest paid.
4) PV= ? , N= 360, I= 1.2% fv= 0, pmt=2880
PV= 236724