Question

1. You just formed your own post-production company and is looking for a loan to finance the purchase of a unit in a commercial building for a studio. The best offer you can get is a 8-year, $5,000,000 loan at 6% from a local bank.
   1. What is the monthly payment on this loan?                             
   2. What is the effective annual rate of this loan?                          

Answer 1

Given:

Principal Value of Loan (PV) = $5,000,000

Rate of Interest = 6% p.a. i.e., 0.5% p.m

Duration = 8 years payable monthly i.e., 96 months

Present Value Annuity Factor (PVAF)(96 months, 0.5%) = 1/1.0051 + 1/1.0052 + ........1/1.00596 = 76.0952183

a) Monthly Payment = PV / PVAF(96 months, 0.5%)

=5000000/76.0952183

= $65,707.151

b) Effective Annual Rate = {1 + (interest rate/no. of compoundings during the year)}no. of compoundings during the year-1

= {1 + (0.06/12)}12 -1

={1.005}12 - 1

=1.06167781 - 1

= 0.06167781 i.e., 6.17% p.a