Tedros borrowed $2 million and planned to repay the loan by making equal month-end payments over
a period of 10 years. The interest rate on the loan is 6%, compounded monthly.
(a) Calculate the amount of monthly payment.
(b) Of the 60th payment, how much will be used to repay the interest and principal for the month?
(c) Tedros plans to pay off the loan immediately after making the 60th payment. What should the
size of the lump-sum (pre-)payment be?
(d) Immediately after the 60th repayment, the central bank increased the market interest rate
and the bank subsequently raised the loan’s interest rate to 8% p.a., compounded
monthly. If Tedros decides to keep the number of remaining payments unchanged,
what is the size of the new monthly repayments?
(e) Calculate the total amount of principal repaid and interest paid in the first 60 monthly
payments. Assume that the relevant interest rate is still 6%, compounded monthly (that is,
[Hint: One make-sense way to think about this is by focusing on the relationships
between amount borrowed, total amount repaid to the bank and the amount still owed
to the bank after the 60th payment is made. You may think of the total amount of
principal repaid first].
(f) Suppose that if the bank allows Tedros to only pay the first five years of interests at
t=60 in a single payment (with principal repayment only to be made at the end of Year
10). How much interests will Tedros has to pay at t=60? What explains the difference
in the total amount of interests paid in part (e) and here [part (f)]? Assume that the
relevant interest rate is still 6%, compounded monthly (that is, not 8%). Get Finance homework help today
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