b) At 1* July 2007, Bandit Bank Ltd made 1000 ten year loans, each promising ann
ID: 1171849 • Letter: B
Question
b) At 1* July 2007, Bandit Bank Ltd made 1000 ten year loans, each promising annual repayments of $3,000 at an interest rate of 8% pa effective One year later, at 1st July 2008, the bank received the scheduled repayments of $3,000 for all the loans. The bank then on-sold the loan portfolio, at a price based on market interest rate of 9.4% pa. Assume no expected defaults Calculate the total income return to Bandit Bank in the year to 1t July 2008 (as a percentage to two decimal places (2 marks) i. Calculate the holding period return to Bandit Bank Ltd over the one year holding (4 marks) period (as a percentage to two decimal places)Explanation / Answer
Initial value of the loan = 0.08*x=3000
= x=$ 37,500
The PV (market price) of the loan after one year. Below table shows the cash flow schedule and discount factor at rate of 9.4%.
Periods
Cash Flow
Discount Factor
PV of Cash Flow
1
3000
0.91
2,742.23
2
3000
0.84
2,506.61
3
3000
0.76
2,291.23
4
3000
0.70
2,094.36
5
3000
0.64
1,914.41
6
3000
0.58
1,749.92
7
3000
0.53
1,599.56
8
3000
0.49
1,462.12
9
40500
0.45
18,042.60
Sum
34,403.04
1) Income Return= 3000/34,403.04= 8.72%
2) The total Holding period return over the period is:
3000+(34,403.04-37,500)/37500=-0.2585%
Periods
Cash Flow
Discount Factor
PV of Cash Flow
1
3000
0.91
2,742.23
2
3000
0.84
2,506.61
3
3000
0.76
2,291.23
4
3000
0.70
2,094.36
5
3000
0.64
1,914.41
6
3000
0.58
1,749.92
7
3000
0.53
1,599.56
8
3000
0.49
1,462.12
9
40500
0.45
18,042.60
Sum
34,403.04
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