A company has borrowed 1,000,000 from a bank which charges 14 % interest per annum. The loan has to be recovered in 5 years compounded annually
(a) How much should the company pay at the end of each year to the bank (assuming uniform payment)?
(b) The bank changes the interest rate to 13 % p.a . at the beginning of 3rd year
(i) What will the amount of the company's last payment (i.e. payment at the end of year 5) if it keeps on paying the bank the same amount as calculated in (a) above at the end of years 3 and 4?
(ii) What will be the company's repayment schedule if it cñooses to pay back the bank in uniform payments at the end of years 3, 4 and 5?
Loan amount=PV=$1,000,000
Number of periods=n=5 years
Rate of interest=i=14%
First we calculate the PV factor of $1 annuity at i=14%, and n=5
a)
Uniform Annual payments=R= PV/PVFa=1000000/3.433081=$291,283.54
b)
i)
Let us see the effect of interest rate change on payment schedule
Year |
Principal Amount, P |
Interest Rate |
Interest, I |
Amount=P+I |
Paid amount, R |
Balance |
1 |
1000000.00 |
14% |
140000.00 |
1140000.00 |
291283.54 |
848716.46 |
2 |
848716.46 |
14% |
118820.30 |
967536.76 |
291283.54 |
676253.22 |
3 |
676253.22 |
13% |
87912.92 |
764166.14 |
291283.54 |
472882.60 |
4 |
472882.60 |
13% |
61474.74 |
534357.34 |
291283.54 |
243073.80 |
5 |
243073.80 |
13% |
31599.59 |
274673.40 |
Payment should be $274673.40 at the end of 5th year
ii) Please refer above table, we find that $676,253.22 is left for payment at the end of year 2
Now,
Loan amount left=PV1=$676,253.22
Number of periods=n=3 years
Rate of interest=i=13%
First we calculate the PV factor of $1 annuity at i=13%, and n=3
Uniform Annual payments=R= PV1/PVFa=676253.22/2.361153=$286,408.1
A company has borrowed 1,000,000 from a bank which charges 14 % interest per annum. The...
James King bought a house three years ago that cost $750,000. James put up 20% deposit and borrowed the rest from FC Bank at a rate of 7.2% per annum, compounded monthly, for 10 years. Three months ago, FC Bank notified James that after the last monthly payment for the third year, the interest rate on his loan will increase to 9.6% per annum, compounded monthly, in line with market rates. Also, from the fourth year of his loan James...
If you borrowed P1000 from a bank with 18% simple interest per annum, what is the total amount to be repaid at the end of 5 years, 6 months and 84 days? with solution
An amount of $15,000 is borrowed from the bank at an annual interest rate 12% h Calculate the repavment amounts if the loan ($15 000) will be repaid in two equal installments of $7.500 each, paid at the end of second and fourth years respectively. Interest will be paid each year Click the icon to view the interest and annuity table for discrete compounding when i- 12%% per year . a. The equal end-of-year payments required to pay off the...
5(a) A company is discussing a $0.5 million loan with a bank. The interest rate is 12% compounded annually and the repayment period is 5 years. The bank is offering two options for loan repayment: Option A: Payments are to be received in equal installments at the end of each year Option B: Interest is to be received on a yearly basis and the Principal is to be received at the end All loan repayment items are end-of-year payments Which...
5(a) A company is discussing a $0.5 million loan with a bank. The interest rate is 12% compounded annually and the repayment period is 5 years. The bank is offering two options for loan repayment: Option A: Payments are to be received in equal installments at the end of each year. Option B: Interest is to be received on a yearly basis and the Principal is to be receivedat the end. All loan repayment items are end-of-year payments. Which options...
After moving to Tampa, Florida USA, Larry Summers borrowed $1,000,000 for a thirty year mortgage at a rate of 5% per annum. (His bank uses the US convention of quoting mortgage rates on a compounded monthly basis.) Larry will pay an equal amount each month, starting one month from now, for 30 years. His final payment will be exactly 30 years (or 360 months) from now. How large is Larry’s monthly mortgage payment? (Do not round intermediate calculations. Round the...
B. On June 5, Scavenger Company borrowed $125,000 from BC Bank. The loan had an interest rate of 10% and was due in 90 days. Scavenger Company's fiscal year-end is December 31. Prepare the journal entry to record the payment of the note on Scavenger's books (6 marks). Show calculation for marks
After moving to Boston, Massachusetts, USA, Larry Summers borrowed $1,000,000 for a thirty year mortgage at a rate of 5% per annum. (His bank uses the US convention of quoting mortgage rates on a compounded monthly basis.) Larry will pay an equal amount each month, starting one month from now, for 30 years. His final payment will be exactly 30 years (or 360 months) from now. How large is Larry's monthly mortgage payment? (Do not round intermediate calculations. Round the...
On April 1, 2017, Mendoza Company borrowed 500,000 euros for one year at an interest rate of 5 percent per annum. Mendoza must make its first interest payment on the loan on October 1, 2017, and will make a second interest payment on March 31, 2018, when the loan is repaid. Mendoza prepares U.S.-dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming the following exchange rates for 1 euro...
Problem 1 (Required, 25 marks) A borrower has borrowed $2000000 from the bank. It is given that the loan charges interest at an annual effective interest rate 16.0755% and compound interest is assumed. (a) Suppose that the borrower decides to repay the loan by 180 monthly payments made at the end of every month, (i) Using retrospective method, calculate the outstanding balance at 60th repayment date. (ii) Calculate the interest due and principal repaid in 120th repayment. (b) Suppose that...