Question

our long term debt represents the remaining balance on a 30 year loan taken out in 1994 at 13% with options to refinance every 10 years. If we refinance for the remaining 10 years at 7% how much interests expense will we save over the remainder of the loan? problem solved, but what was the original balance or principle in1994?

SubiaK . 1 day later Refinancing would lower the interest payment on the loan. Balance loan amount for remaining 10 years is $37,000,000 Refinancing is done at the rate of 7% instead of an earlier interest rate of 1 1 %. Interest to be paid at 13% rate is calculated as below P* (1 r) - P 10. 37000000*(1+ 0.13) 37000000 - 125598993.43 - 37000000 $88598993.43 Similarly, Interest to be paid at 7% rate is calculated as belovw 37000000*(1+0.07) 37000000 72784600.20 37000000 $35784600.22 10.

Answer 1

Outstanding Balance at the end of Year 20 (last 10 years remaining of a 30 year loan) = $ 37000000, Interest Rate = 13 %

and original tenure = 30 years

Let us assume that the loan is being repaid by means of equal annual installments each worth $ K. The present value of the remaining annual installments at the end of Year 20 should sum up to equal the outstanding balance of $ 37000000

Therefore, 37000000 = K x (1/0.13) x [1-{1/(1.13)^(10)}]

37000000 = K x 5.426243

K = 37000000 / 5.426243 = $ 6818714.16

Now, when one discounts the value of all 30 installments to 1994 (20 years ago because a loan of 30 year has 10 years remaining at current time) and then adds them, one should end up with the original loan balance.

Therefore, Original Loan Balance = 6818714.16 x (1/0.13) x [1-{1/(1.13)^(30)}] = $ 51110718.27