solution

Helenâ€™s husband Jake, is also considering buying an investment property, but in Adelaide instead. Jake has calculated that he needs to borrow \$450,000 from the bank to fund this purchase. The details for his loan are as follows:

â€¢ The repayments for this loan will be made on a FORTNIGHTLY basis, the first payment being exactly 2 weeks from today. For the purposes of this assignment, assume there are EXACTLY 26 fortnights per year.

â€¢ The loan will be repaid over 30 years with level repayments.

â€¢ The interest charged on the loan is 5% p.a. compounding half-yearly

Using this information, answer the following questions.

d) Calculate the effective fortnightly rate for Jakeâ€™s loan. Give your answer as a percentage to 4 decimal places. (1 mark)

e) Draw a cash flow diagram for Jakeâ€™s loan as described above. Then calculate the size of his level repayment. (2 marks) After speaking with the bank further, Jake has found that there is a different repayment plan available. In this second repayment plan, Jake would make interest-only payments for the first 2 years of the loan, and then level principal-and-interest repayments for the remaining 28 years after that. All other details for the loan remain the same.

f) Draw a cash flow diagram for Jakeâ€™s loan if he decides to go with this repayment option. (1 mark)

g) Calculate the size of a single interest-only payment (those made within the first 2 years) and separately the size of a single principal-and-interest repayment (those made within the remaining 28 years). (2 marks)

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