| Country : | Australia |
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Assignment Task
Questions:
Jerry is considering taking out a loan of $100,000 to make an investment. The details for the loan are as follows:
• Repayments will be made on a half-yearly basis. However, the first repayment will be made exactly THREE months from today.
• The loan will be repaid by 10 level repayments
• The interest charged on the loan is 6% p.a. compounding monthly
Using this information, answer the following questions.
a) Let rq denote the equivalent effective quarterly (i.e. a 3-month period) rate charged on Jerry’s loan. Write down an equation that can be solved to obtain the effective quarterly rate (your equation should involve rq). You do NOT need to solve this equation.
b) Explain whether or not we should use the interest rate rq in an annuity formula when working with Jerry’s loan.
c) State clearly the type of effective rate that should be used in an annuity formula for Jerry’s loan as described above (e.g. “effective monthly rate”, “effective weekly rate”). Then determine the value of this effective rate. Express your answer as a percentage to 4 decimal places.
d) Draw a cash flow diagram, and then determine the size of the level repayment for Jerry’s loan.
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