Question

a. You are considering an investment of $55,000 in an account that pays 8.3 percent compound interest. How much less interest would you earn in a 3-year period if the interest was simple?

(10%) b. Your firm wants to borrow $250.000 for 10 years from the bank in order to pursue a big

investment opportunity. The bank will lend the money but it requires an upfront fee of $ 10,000. The interest is 6.3%. How much will you be paying per year for this loan? (20%)

c. You are considering 30 year fixed rate mortgage to buy a new home for $200,000. The bank offers an 3.3% APR for this loan. You can only afford monthly payments of $400, so as a solution you offer to pay off any remaining loan balance at the end of the loan in the form of balloon payment. How large should this balloon payment ? In which case in the real world would a balloon payment make sense? (20%)

Answer #1

a. Interest Earned under Compound Interest = Principal * (1 + r)^N - Principal

Interest Earned under Compound Interest = 55000 * ((1.083^3) - 1)

Interest Earned under Compound Interest = $14863.13

Interest Earned under Simple Interest = Principal * Rate * Years / 100 = 55000 * 3 * 8.30% / 100 = $13695

**Less interest would you earn in a 3-year period if the
interest was simple = $14863.13 - 13695 = $1168.13**

b. Yearly payment

c. PV of Payments = PV(0.033/12,360,-400)" = $91333.54

Principal yet to be paid in present value terms = $200000 - 91333.54 = $108666.64

**balloon payment = 108666.64*(1+(0.033/12))^360 =
$292049.83**

**Loan taken in purchase of car or in purchase house are
probably result in Balloon Payment**

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You need a 20-year, fixed-rate mortgage to buy a new home for
$180,000. Your mortgage bank will lend you the money at a 6.6
percent APR for this 240-month loan. However, you can afford
monthly payments of only $950, so you offer to pay off any
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single balloon payment. Required: How large will this balloon
payment have to be for you to keep your monthly payments...

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single balloon payment.
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