Corporate Finance CUAC207 Tutorial 3 2016

Corporate Finance CUAC207 Tutorial 3 2016

Amortization and Sinking Funds

Please ensure that you have attempted all the questions in this tutorial before you come to your allocated tutorial period. Registers will be marked

1) You purchase an apartment for $180 000 with a down payment of $45 000. You secure a mortgage bond with a bank for the balance at 18% p.a. compounded monthly, with a term of 20 years.

a) What are the monthly payments?

b) Draw up an amortization table for the first six payments of the loan, and one for the last six payments (that is 235th to the 240th payments).

2) Draw up an amortization table for a loan of $4 000 for three years at 12% per annum compounded half-yearly and repayable in six half-yearly payments. How much interest will you pay over the life of the loan?

3) With reference to the apartment you bought in question 1 above, what is your equity in the house after 12 years?

4) Mr. Wheel and Deal wishes to borrow $50 000 for five years for a business venture. The Now Bank is willing to lend him the money at 15% p.a. if the debt is amortizes by equal yearly payments. On the other hand, the Yesterday’s Bank will lend the money at 14% p.a. provided that a sinking fund is established with it on which it will pay 11% p.a. to accumulate the principal by the end of the term, with equal annual deposits. What is the difference in total annual payments between the two plans?

5) Jonathan purchases an apartment by making a down payment of $60 000 and obtains a 20-year loan for the balance of $120 000 at 20% p.a. compounded monthly. After four and a half years the bank adjusts the interest rate to 18%.

a) What is the new amount that he must pay if the term of the loan remains the same?

b) If we assume that the interest rate of 20% p.a. will remain fixed over the 20-year period, what is the total amount Jonathan pays back to the bank?

c) Again assuming a fixed interest rate of 20% p.a. for the full term of the loan, what is the total real cost of the loan if the expected average rate of inflation over the term of the loan is 10% per year?

6) Edgar, a dynamic young executive, calculates that he can sell his house so as to have $180 000 available for a down payment on a new house. The price that the seller is willing to accept for Edgar’s dream house is $760 000. To this Edgar will have to add an extra $52 000 made up of estate agent’s duties, transfer fees and the premium on an insurance policy that will cover the outstanding principal owed in the event of Edgar’s death. His company will pay him a housing subsidy of $1 700 per month and also has sufficient financial leverage to secure him the necessary mortgage bond at 18% p.a. (compounded monthly) for a period of 20 years. Assuming that Edgar is, for the next few years, willing to commit himself to up to a third of his gross monthly salary of $21 000, should he buy or not?

Corporate Finance CUAC207Page 1