Question 1 – Which are the better loan terms?

 

Ashley Pinker does not have her own capital to invest, but she needs to raise $40,000 to renovate and refit an old shed at the back of her house, which is to become the office plus storage space for GET FLOCKED! Ashley is considering taking a 10-year loan for the required amount. A local bank charges 7.8% per year compounding quarterly and requires quarterly repayments.

 

  • (2 marks) Use EXCEL to calculate the quarterly repayment that Ashley would have to make on this loan.

EXCEL Instructions: Refer to Topic 4 in the EXCEL booklet for instructions on how to use financial functions to make annuity calculations.

  • (8 marks) Use EXCEL to set up an Amortisation Schedule for the loan. Include your completed EXCEL amortisation schedule in Appendix 1.

EXCEL Instructions: Refer to the amortisation example in Week 3 lecture notes and the corresponding EXCEL spreadsheet, which you can use to help you create the amortization schedule for this question. Be sure to add your initials to all column names. Use formulas, do not simply type in values!

  • (2 marks) Use your amortisation schedule from part (b) to calculate the total interest and the total amount paid over the life of the loan.

The bank has also offered Ashley a two-year interest-only option with her ten-year loan. This means that for the first two-years, every quarter Ashley would pay only interest on the amount borrowed. Loan repayments consisting of both interest and principal would then commence in year three and continue for eight years.

  • (2 marks) Use EXCEL to calculate the quarterly repayment that Ashley would have to make starting in year three, assuming 8-year amortisation.

EXCEL Instructions: Refer to Topic 4 in the EXCEL booklet for instructions on how to use financial functions to make annuity calculations.

  • (8 marks) Use EXCEL to set up an Amortisation Schedule for the loan with the two-year interest-only option. Include your completed amortisation schedule in Appendix 1.

EXCEL Instructions: Start with the amortisation schedule from part (b) and modify it appropriately to account for the interest-only period. Be sure to add your initials to all column names. Use formulas, do not simply type in values!

 

  • (2 marks) Use your amortisation schedule from part (e) to calculate the total interest and the total amount paid on the loan.

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