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
Posted: Mon Nov 15, 2021 5:09 pm
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.
c) Determine the size of the fortnightly MIF.
d) Produce a new fully labelled time line diagram for the
loan repayment scenario, showing all the values, and incorporating
the MIF’s.
[2 marks]
e) 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].
[3 marks]
f) Using an estimate of i=0.002, determine the value of
the right hand side of the equation of equivalence.
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.
c) Determine the size of the fortnightly MIF.
d) Produce a new fully labelled time line diagram for the
loan repayment scenario, showing all the values, and incorporating
the MIF’s.
[2 marks]
e) 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].
[3 marks]
f) Using an estimate of i=0.002, determine the value of
the right hand side of the equation of equivalence.