Kim and Lee wish to borrow $200,000 from the Unity Bank as a P&I loan, in order to buy an apartment. They intend to repa

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answerhappygod
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Kim and Lee wish to borrow $200,000 from the Unity Bank as a P&I loan, in order to buy an apartment. They intend to repa

Post by answerhappygod »

Kim and Lee wish to borrow $200,000 from the Unity Bank as a
P&I loan, in order to buy an apartment. They intend to repay
the loan over 15 years with regular fortnightly payments, with the
first payment being one fortnight after they take out the loan. The
Unity Bank charges interest at j26 = 4.94% p.a. When they read the
loan information carefully Kim and Lee find out that because they
are considered “risky” borrowers, they will need to pay a
fortnightly Mortgage Insurance Fee (MIF) every fortnight for the
first three years of their loan. The fortnightly MIF is set at
0.016% of the amount borrowed.
Kim and Lee want to be able to compare the loan from the Unity
Bank with what is available from other banks. To do this they need
to know the comparison rate. To do this they need to solve an
Equation of Equivalence (EoE). This is an expression of the form
PV(what you get) = PV(what you pay). Derive and
present the EoE that is appropriate for this scenario. Do NOT
seek to simplify the expression. NB [Hint: This is a "Price is
Right" type of problem].
Present your next two estimates of i and the corresponding
value of the right hand side of the equation of equivalence. Ensure
that for each of these two steps you explain why you increased or
decreased the value of i.
[2+2 = 4 marks]
Determine a value of i, for which the Left Hand Side (LHS) and
Right hand Side (RHS) of the equation of equivalence vary by no
more than $10.00. NB You do not need to show any working for this
question part, but merely present your answer, and the values of
the RHS and LHS.
[2 marks]
Using you answer from part (h) determine the j26 comparison
rate for the Unity bank loan, and proceed to express this as an
effective annual (j1) rate.
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