Question 612 Marks A loan of $100,000 was issued on 1 January 2015, to be redeem

Question

Question 612 Marks A loan of $100,000 was issued on 1 January 2015, to be redeemed by a constant annual service of $18,000, except possibly for a smaller service in the final year of redemption. The coupon rate borne is 12% pa, payable monthly. All coupon payments are made at the end of the month; and capital payments are made only on 31 December in each year. (a) Calculate (i) the calendar year of final redemption of the loan; (i) the annual service in the final year, together with its breakdown into capital and interest payments. (5 marks) (b) You discount future cash flows at an effective interest rate of 10% pa. Calculate the present value to you of the outstanding loan repayments as on 1 January 2017, just after the payment of capital and interest due on 31 Decem ber 2016, and given that your interest income is taxed at the rate of 20%. (7 marks)

Explanation / Answer

(a)

(i)

The Calender Year of Final Redemption of Loan is 2031.

(ii) Annual Service Payment Breakdown

(b) Total PV of Outstanding Repayment amount on 1.1.17 is $ 1,29,064

Year Starting balance Repayment Interest paid Principal paid New balance 2015 $100,000.00 $18,000 $12,000 $6,000 $94,000 2016 $94,000.00 $18,000 $12,000 $6,000 $88,000 2017 $88,000.00 $18,000 $12,000 $6,000 $82,000.00 2018 $82,000.00 $18,000 $12,000 $6,000 $76,000.00 2019 $76,000.00 $18,000 $12,000 $6,000 $70,000.00 2020 $70,000.00 $18,000 $12,000 $6,000 $64,000.00 2021 $64,000.00 $18,000 $12,000 $6,000 $58,000.00 2022 $58,000.00 $18,000 $12,000 $6,000 $52,000.00 2023 $52,000.00 $18,000 $12,000 $6,000 $46,000.00 2024 $46,000.00 $18,000 $12,000 $6,000 $40,000.00 2025 $40,000.00 $18,000 $12,000 $6,000 $34,000.00 2026 $34,000.00 $18,000 $12,000 $6,000 $28,000.00 2027 $28,000.00 $18,000 $12,000 $6,000 $22,000.00 2028 $22,000.00 $18,000 $12,000 $6,000 $16,000.00 2029 $16,000.00 $18,000 $12,000 $6,000 $10,000.00 2030 $10,000.00 $18,000 $12,000 $6,000 $4,000.00 2031 $4,000.00 $12,000.00 $8,000 $4,000 $0.00

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