Question

3.1 (5 marks) A bank has a listed prime rate of 7%. They have estimated that the marginal cost of raising funds is 5%, their default risk premium on a loan is 1.5% and that they want a profit margin of 2%. They have also estimated that the term risk premium is .5%. What is the interest rate this bank will charge if they use the cost plus pricing model? 3.2 (5 marks) A borrower has asked for a 20-year mortgage to purchase a home in the capital city. The house's purchase price is VND 15,000,000, of which VND 12,500,000 is borrowed. If the APR on this loan is 14%, how much will the borrower's total financing charges be?

Question

Answer 1

1. Interest according to Cost-plus pricing model = Cost of raising funds+ default risk premium + term risk premium + profit margin = 5% + 1.5% + 0.5% + 2% = 9%

2. Total Monthly EMI = P*r*((1+r)^n / ((1+r)^n -1)) [r = monthly rate = APR/12=0.14/12, n = no of payments = 240]

12,500,000*(0.14/12)*((1+(0.14/12))^240)/((1+(0.14/12))^240)-1))

= 155440.10

Total Payment = Monthly EMI * No of payments = 155440.10*240 = 37305624

Total Principal Amount = 12,500,000

Total Loan payment = Total Payment - Principal = 37,305,624 - 12,500,000 = 24,805,624

Total financing charges = VND 24,805,624