🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
Finance
2
answers
0
watching
106
views

Home loans typically involve “points,” which are fees charged by the lender. Each point charged means that the borrower must pay 1% of the loan amount as a fee. For example, if the loan is for $120,000 and 2 points are charged, the loan repayment schedule is calculated on a $120,000 loan but the net amount the borrower receives is only $117,600. Assume the interest rate is 1.00% per month. What is the effective annual interest rate charged on such a loan, assuming loan repayment occurs over 216 months? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Use a financial calculator or Excel.) Effective annual interest rate

Watch
2
answers
0
watching
106
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share
Reid Wolff
Reid WolffLv2
28 Sep 2019
Already have an account? Log in
Share

Related questions

John took a mortgage loan 5 years ago for $120,000 at 7% interest for 15 years, to be paid in monthly payments. Now, a lender is offering him a new mortgage loan at 5% for 10 years. The new loan amount is $92,895, the outstanding loan balance of the existing loan. Suppose that a prepayment penalty of 3% must be paid if John refinances the existing loan. Moreover, the lender who is making the new loan requires an origination fee of $3,000. John plans to hold the property for 10 years. Note: John has to pay the refinancing fees (i.e., the origination fee and the prepayment penalty) out of his pocket.

(a) What is the total financing cost (not include the loan amount itself) if John decides to refinance the old loan?

(b) What is the monthly savings that John could realize by refinancing?

(c) Given the information provided here, should John refinance? Please support your answer by calculating the effective interest rate of the new loan.

(d) Now suppose that John’s current income is low. The new lender allows him to pay a monthly payment of $300 for the new loan (i.e., the actual monthly payment to the lender is only $300, while the loan interest rate is 5%). In this situation, negative amortization occurs. What will be the accrued interest or the amount of increased loan balance for the loan three years later from now?

(e) Assume that John has to borrow two loans in order to refinance. That is, he has to borrow a new mortgage ($70,000) at 5% for 10 years (i.e., the loan maturity and the amortization period are the same, 10 years) and another mortgage ($22,895) at 9% for 5 years (the loan maturity and the amortization period are the same, 5 years). In this case, with the same origination fee of $3,000 (i.e., a total of $3,000 for the two loans) and the prepayment penalty of 3%, should John go ahead with the refinancing plan? Why?

(I primarily need assistance with Sections D and E as I believe I have A-C correct)

Please show formulas and explanations

Many farming households in the developing world use traditional biomass, kerosene and liquefied petroleum gas (LPG) for cooking and lighting. Domestic biogas – generated from the dung of farming animals – has the potential to replace other fuels for meeting basic energy needs. However, high-quality systems such as fixed-dome plants1 can be relatively expensive – especially if constructed in remote areas, where not all building materials are readily available, and where perhaps no skilled masons are located. Farmers might not have either the required capital for cash purchase, nor the required income or creditworthiness for raising – and paying back – a credit.

A current debate – particularly in international development cooperation – deals with the question of how local financial institutions (FIs) can be integrated in the financing process. It is debatable, and it may differ from case to case, if lending for biogas is a viable business (and FIs have not yet realised the market potential), or if the lending potential is limited and an involvement of the private financial sector is rather more wishful thinking than a realistic option.

There have been several attempts for introducing local FIs to biogas finance. Besides technical assistance (such as trainings, capacity building, business development support), different financial support mechanisms have been considered for making the investment affordable for the farmer, and for introducing local FIs to biogas lending. This assignment should assess if and under which conditions i) a biogas plant is a financially viable investment; ii) local FIs can be involved in the development of a sustainable biogas market.

BASIC ASSUMPTIONS

• A 6m3 fixed-dome biogas plant (size for a small farmer family) costs 660 USD, and has a 15 year economic life-time;

• By using biogas instead of kerosene and LPG, and by using the resulting bio-slurry to replace chemical fertiliser for agricultural needs, a farmer can save on average 147 USD p.a. (given fixed prices);

• Interest rates for annuity loans under 1,000 USD are 36 percent p.a. (monthly equal instalments); the loan tenor is 12 months.

QUESTIONS[1]

What are the internal rate of return (IRR) and payback period of the biogas investment – considering the savings on kerosene, LPG and fertiliser as revenues (i.e. positive cash flow)? How do you interpret the results with regard to the investment’s overall attractiveness and financing requirements for the farmer? (approx. ½ page) (15 points)

Assuming a positive net present value (NPV) of the investment, the initial capital expenditure (CAPEX) is often not affordable for small farming households. A bank loan could help the farmer to purchase the biogas plant. It is initially assumed that there is no down-payment (equity contribution) from the borrower, and no subsidy from third parties – i.e. the CAPEX has to be fully covered by the loan.

What is the monthly instalment (repayment and interest) to pay back the annuityloan? (10 points)

What is the total (accumulated) interest amount paid after 12 months? (5 points)

How does the total payment over 12 months (initial loan amount plus

accumulated interest) relate to the annual savings the farmer can generate from

not anymore using kerosene, LPG and chemical fertiliser (again considering thesesavings as revenues, and having in mind that farmers perhaps do not haveregular monthly income)? (approx. ½ page) (10 points)

3. Given the high interest rates (36 percent p.a.), an international donor institution temporarily offers an ‘interest softening’ mechanism, reducing the interest for ultimate borrowers substantially to 9 percent p.a.[2]In turn, local FIs expand the loan tenor to 3 years (still monthly equal instalments).

a. What impact do these new loan conditions have on the farmer’s annual instalments?[3]How much household income (in addition to fuel and fertiliser savings) would be required per year for paying back the loan? (10 points)

b. How much would the donor contribute to financing of the biogas plant, both in absolute terms (USD), and relative to the initial investment costs (CAPEX) of the plant?[4] What could be the concerns of subsidising a large share of the investment costs through this interest softening mechanism? (approx. ½ page) (10 points)

c. In what way does the interest softening mechanism, combined with the extended loan tenor, improve the farmers’ access to finance, and justify the involvement of the financial sector? (approx. ½ page) (10 points)

4. Given the high demand for domestic biogas plants, and assuming that – even with

interest softening and tenor extension as described under task 3 – still many farmers

cannot afford a loan, the same donor institution decided to additionally provide a 30

percent CAPEX subsidy.

a. What impact does the CAPEX subsidy have on loan amount, annual instalments,

required household income, and the donor’s contribution to financing of the

biogas plant? (10 points)

b. What are the pros and cons of providing a one-time (up-front) subsidy payment?

(approx. ½ page) (10 points)

5. The donor institution offers both support mechanisms – interest softening and CAPEX

subsidy – only temporarily. What could be the reasons for the temporary nature of theseinterventions, and what positive effects does donor presumably aim for after

withdrawing from the market? (approx. ½ page) (10 points)

[1]It is recommended to use MS Excel for calculating IRR, annuity, instalments etc. For arithmetical tasks, please outlineyour approach (e.g. formulas, basic calculations) and provide a brief written analysis of your results. Small graphs andshort tables can be included in the text; large graphs and extensive tables should be attached as an Annex.

[2]In this context, interest softening is defined as a subsidy payment on the interest of each individual loan (or each

individual instalment, respectively) – not as a subsidised, interest-reduced credit line (so-called concessional finance,typically applied by development banks).

[3]Bear in mind that – for an annuity loan – repayment amount and interest payment change over time, resulting in

different annual instalments for each year.

[4] Bear in mind that the donor subsidizes the interest payment every month over the entire loan tenor.

PART A
Jasper is a furniture manufacturer who runs a successful business in Caroline Springs as a sole trader. He owns the land on which his existing factory is built together with plant and equipment including two motor vehicles. He wants to take on partners to help put into effect his grand plans for expansion including the setting up of several more factories. Obviously, he says to himself, I need an injection of funds to finance these great plans.
So Jasper goes to a branch of the Very Accommodating Bank (‘VA Bank’) that has just opened up in his area.
On 31 August he sees the local manager of the VA Bank, a lady called Gloria. He discusses with Gloria the amount of borrowed funds Jasper thinks he will need for his business. They agree that a loan of $750,000.00 would meet Jasper’s immediate needs.
They discuss different types of loans and Gloria says: ‘Well, Jasper that is all very interesting. Based upon my experience with similar businesses to yours, I can say that the Bank would be very interested in lending you what you need. Of course we would require security. We would certainly require a mortgage over your real property together with a fixed/floating charge over your other assets.’
Jasper says that he doesn’t want to pay high fees and requires an interest rate of no more than 7% payable quarterly for the loan. Gloria says: ‘As to interest, I can only tell you that our current rate is 7.25%. What do you think about all of this? ‘Jasper says to her: ‘I will think about it and get back to you.’ Gloria says: ‘Well, don’t take too long about it.’
Jasper is getting a little fed up with Gloria’s over bearing manner and thinks he can get a better deal elsewhere. Unfortunately, he finds that in fact no one else will lend to him. So two weeks later on 14 September Jasper emails Gloria, in which email he states: ‘I accept your offer of 31 August.’
A week later Jasper phones Gloria to ask when he can access the loan. Gloria says to him: ‘Sorry, Jasper, but there has been a downturn in the Bank’s shares and the interest rate for loans such as yours is now 8.5%.’
(a) Ignoring legislation or Codes of Conduct, advise Jasper as to whether or not VA Bank is obliged to provide him with a loan of $750,000.00 at 7.25%. Give reasons for your answer.​ [5 marks]
Although he is dismayed at the Bank’s attitude, Jasper is desperate to get his plans under way and phones Gloria saying: ‘We agree to your terms but I have one question of importance to me - Can I have the option of repaying the loan on an interest only basis instead of repaying principal and interest should my circumstances make such a change necessary?’ To which Gloria replied: ‘I am fairly certain you can have that facility.’
Jasper receives the Bank’s standard contract documents for the loan, signs them and returns the documents to Gloria. Unfortunately Jasper was pressed for time and did not actually read the contracts before signing. On reading them the next day he is dismayed to find that they contain the usual obligations to repay regular instalments of principal and interest but there is no reference to an option to pay interest only.
(b) Advise Jasper if he can insist upon the Bank including an option clause in the loan agreement.​​ [3 marks]
Finally, Jasper had previously banked at the ​Westfall Bank. In the course of discussions between Gloria and Joe, the Manager of Westfall Bank, Joe tells Gloria that Jasper needs to be kept an eye on as he was always writing cheques in favour of the local casino. Gloria passes this information on to Jasper, who is appalled at this slight on his reputation.
(c) Advise Jasper what rights he has against Westfall Bank. [2 marks]​
PART B
Chameleon Ltd is a customer of the Caring and Wealthy Bank. It is a very large company and employs more than 100 people and therefore the Code of Banking Practice does not apply to it. When it opened its account with the Caring and Wealthy Bank, Chameleon Ltd agreed to be bound by this Bank’s terms and conditions as notified to it from time to time. Six months after the account is opened Caring and Wealthy Bank sends its statement to Chameleon Ltd together with the following letter:
PLEASE READ THIS LETTER. IT CONTAINS EXCITING NEW INFORMATION ABOUT YOUR ACCOUNT.
Dear Customer (‘you’),
The Caring and Wealthy Bank (‘us’) is always trying to find new ways to service you.
To enable us to do this, however, we have decided to introduce a new term of the contract between you and us. This is to enable us to reduce costs in one area so we can provide you with exciting new services. The new clause 12 of the contract between you and us is as follows:
The customer (‘you’) must read each bank statement sent to you. If there are any inconsistencies in the statement you must notify the bank of the inconsistencies within 10 business days. Failure to notify us of such inconsistencies means the amount of the balance contained in the incorrect statement represents what you owe us or what we owe you, as the case may be.
The managing director of Chameleon Ltd receives the bank statement and letter. She doesn’t read the bank statement. She starts to read the letter but throws it in the bin after she reads the first sentence thinking the bank is trying to sell new products to the company. ‘Just another publicity stunt,’ she remarks to the office cat.
The bank statement shows that between 1 February and 1 April $1 million has been fraudulently withdrawn from the company’s bank account. Chameleon Ltd does not notify the bank of the fraudulent withdrawal within 10 business days of receiving the statement. It is later discovered by the bank that an employee of Chameleon Ltd, called Cynthia, had fraudulently withdrawn the $1 million and then proceeded to lose the whole sum at the casino. The bank was then informed.
Two months later on 1 June the managing director becomes aware that on 15 May, Colin, the company’s accounts clerk, had fraudulently stolen $2,000 from the company’s current bank account at The Caring and Wealthy Bank by forging company cheques. Colin’s wife had just died and the managing director does not tell the bank about the forgeries. On 30 July, Colin steals a further $1,000 from the company account in the same manner.
After discovering on 30 July what Colin has done, the managing director comes to you and asks you to advise Chameleon Ltd what to do and whether The Caring and Wealthy Bank is entitled to debit the company’s account for
1. the $1million stolen by Cynthia and
2. the $3,000 in total stolen by Colin.
Advise Chameleon Ltd giving reasons with relevant cases. Consider what effect, if any, the letter from the Bank purporting to introduce a ‘NEW TERM’ has on the situation? What Duties of the Banker and Customer ,if any,are involved here? ​ [7 marks]
PART C
Martin Pty Ltd has an account with the Caring and Wealthy Bank named ‘Wages Account’ used (as Martin’s CEO explained to the Bank’s Manager ) for payment of wages to staff. The balance in credit was $25,000.The company also had a current account in debit to the extent of $10,000 and a loan account so designated in debit to the extent of $15,000.
Can the Bank combine any of these accounts? Explain the concept of Combination of Accounts using case law to illustrate your answer. [3 marks]

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in