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Aliun [14]
2 years ago
6

A borrower is interested in comparing the monthly payments on two otherwise equivalent 30 year FRMs. Both loans are for $100,000

and have a 7% interest rate. Loan 1 is fully amortizing, where as Loan 2 has negative amortization with a $120,000 balloon payment due at the end of the life of the loan. How much higher is the monthly payment on loan 1 versus loan 2
Business
1 answer:
Gemiola [76]2 years ago
4 0

Answer:

The monthly payment in Loan 1 is higher than in loan 2 by:

(665.30 - 566.94) = $98.36

Explanation:

Solution:

Comparison of Loan 1 and Loan 2 in terms of monthly payments.

For the first loan, we have to calculate equal monthly payments with the following details:

Principal = $ 100,000,

Monthly Interest rate = 7/12 = 0.58% ,

Term = 360 months

Use the PV = C (1 - (1+r)-n ) / r ,

where PV = Principal, r = monthly rate, n = 360 and

find C (EMI) = $665.30

NOTE: (Excel function is used: PMT(rate, year, PV) formula for convenience)

For Loan 2, we have to understand a few things.

The original loan principal is $ 100,000,

but you are allowed to do a balloon payment of $ 120000 at the end of 30 years.

The present value of the Balloon payment can be deducted from the principal to find out the monthly cash payments to be done.

The monthly payments will of course be lower since a lump sum balloon payment is done at the end.

The calculation is similar to the above. In this scenario, the Monthly payment comes out to be $ 566.94

Hence,

The monthly payment in Loan 1 is higher than in loan 2 by:

(665.30 - 566.94) = $98.36

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The Security Market Line (SML) shows the relationship between stocks' required rates of return (measured on the vertical axis) a
natka813 [3]

Answer:

True

Explanation:

The reason is that the straight line equation is used to illustrate the relation between the rate of return and the beta factor and is given as under:

Y = a + bX

Here

a = Rf

B = Risk premium = Rm - Rf

X = Beta Factor

So this means the security market line is the graphical presentation of capital asset pricing model and illustrates why the increase in beta factor increases the required rate of return, the reason is that the the overall required return Y of the investment will start increasing with the increase in the beta factor.

So the statement is true.

5 0
3 years ago
Jacob Corcoran bought 10,000 shares of Grebe Corporation stock two years ago for $24,000. Last year, Jacob received a nontaxable
Evgen [1.6K]

Answer:

Explanation:

Given that :

Jacob Corcoran bought 10,000 shares of Grebe Corporation stock two years ago for $24,000.

Last year, Jacob received a nontaxable stock dividend of 2,000 shares in Grebe Corporation, and

In the current tax year, Jacob sold all of the stock received as a dividend for $18,000.

The objective is to prepare a memo for the tax research file describing the tax consequences of the stock sale.

From the tax research file:

The gain on the sale of the 2,000 shares is calculated by the difference from the sales price and the shares sold.

I.e $24000 - $18000 = $6000

The tax rate on the $2000 = Purchase price of the shares/ (Original shares bought + new shares)

The tax rate on the 2000 shares = $24000/($10000+$2000)

The tax rate on the 2000 shares=  $24000/$12000

The tax rate on the 2000 shares=  $2 / shares

The Gain in the share = selling price - tax basis in the 2,000 new shares

The Gain in the share =  $18000 - $4000

The Gain in the share = $14000

∴

This is the long capital gain i.e  $14000

The memo in summary goes thus:

The amount of $24000 is being paid by you for 10000 shares of stock in Grebe Corporation in which a stock dividend of 2000 was received. However, the share is sold for $18000, the tax basis is deduced by dividing $24000 purchasing price by $12000(original price + new shares price) which resulted into a $2/ shares.  The $14,000 gain on the sale is a long-term capital gain. The gain on the sale is long term because the original Grebe stock has been held for more than one year.

5 0
2 years ago
Kevin, who has liability limits of $20,000/$40,000/$20,000 and a $500 collision deductible, is involved in an accident. Due to h
harina [27]

Answer:

Amount to pay by PAP = $39,600

Explanation:

The liability limits of $20,000/$40,000/$20,000 implies that the highest amount PAP will pay for driver's injuries is $20,000, while the highest to pay for the first of two passenger is $40,000 and $20,000 for second passenger.

Since the a passenger received injuries worth $12,500, and another passenger received injuries of $7,100, the PAP will the actual amount and $20,000 for the driver's injuries. The total can therefore be calculated as follows:

Amount to pay by PAP = $20,000 + $12,500 + $7,100 = $39,600

4 0
3 years ago
"Bronson Manufacturing is planning to issue $12 million in bonds. Based on a poll of potential investors, they have the highest
telo118 [61]

Answer:

C.eight-year bond with 5.5% annual interest rate

Explanation:

The computation of the total options under each option is as follows:

As we assume the par value be $1,000

For Option A

Total interest

= 9.5% × $1,000 × 3 years

= $285

For Option  B      

Total interest is

= 7.25% × $1,000 × 4 years

= $290

For Option C

Total interest is

= 5.5% × $1,000 × 8 years

= $440

For Option D

Total interest is

= 6% × $1,000 × 6 years

= $360

As we can see that the option C contains high value of the total interest. So the same is to be selected

6 0
2 years ago
Which one of the following basic patterns of demand is difficult to predict because it is affected by national or international
alexdok [17]

Answer: D) cyclical

Explanation:

Cyclical Demand is difficult to predict because it goes according to the business cycle and hence is affected on a Macro Economic scale by events at a National or International level.

This means that something could be in demand today but the demand could fall or rise sharply based on the stage of the business cycle the economy is in.

8 0
2 years ago
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