Question

Please answer or give me a hint for the following question.

A company has borrowed $1,100,000 from a bank under a mortgage backed, credit foncier loan with conditions of a fixed 5 year interest rate of 6.5% per annum, repayable by equal annual repayments with a term to maturity of 25 years. The Board has asked for advice as to the risk they are taking should interest rates increase significantly in 5 years time, and as such have asked you to calculate the amount that will still be owing on the property at the end of the 5th year and comment on the extent of the risk.

Answer 1

The amoint that will still be owing on the property at the end of the 5th year would be $993,645. It is a huge ampount an if the interest rate increases significantly after 5 years, the installments amounts of the loan will increase as result of higher interest rate amount. The interest rate risk is very much as the amount owed after 5 years is very high as the higher interest burden will be on the company.