Week 4 Hand-in Assignment Loan Facts: Amount 15,000 4-years 6% (APR)

Loan terms Bank A Amortising loan Interest on monthly basis Payments monthly basis Bank B Amortising loan Interest on quarterly basis Payments quarterly basis Bank C Non-Amortising loan Interest on daily basis Payments yearly basis

Question 1:
Bank A Bank B Total Payment 16,909.22 16,983.62 Periodic rate 352.28 1,061.48 Equation 15,000 = C x [[(1-(1/1.00548)]/.005] 15,000 = C x [[(1-(1/1.01516)]/.015] Bank C 18,709.88 927.47 XXX

Question 2:
Total Interests Bank A 1,909.22 Bank B 1,983.62 Bank C 3,709.88

Question 3:
EAR Bank A 6.18% Bank B 6.17% Bank C 6.18%

Question 4: Bank A - Amortization table:

Bank B - Amortization table:

Bank C Non-Amortization table:

Question 5: Why does the payment differ? The payments differ due to different payment agreements. Mostly it depends on the liquidity of the customer and the business concept of the bank. Small or medium sized loans are often amortization loans. The customer pays fixed or variable rate and pays of the loan during a specific period. On the other hand also non-amortising loans are possible. The loans are not reduced during the period rather the creditor will pay of the loan at the end of the loan period in one single payment called bulled payment, fine payment or ballon payment. This agreement is often applied for large sums like loans for real estate lending. Why is the total amount of the loan different? The total amount can differ due to compounding. If the same amount of loan and the same annual rate are differently compounded by loans (during the year) at the end of the year the total amount will be different. This is related to the concept of money makes money. The loans which are compounded during the year will generate small interest and if this interest will be left in the account they increase the basis amount on which interest are paid. Why is the Effective Annual Return (EAR) different from the Annual Percentage Rate (APR)? The Effective Annual Return differs from the APR because the interest gets compounded during the year. Paid interest during the year will be left in the account and the interest will also be paid on the already paid interest Interest earning interest or money makes money. Due to this circumstance, the total interest compounded daily, monthly or quarterly is higher at the end of the year compared to an annual compounding. Due to the fact, that the total amount at the end of the year is higher also the effective rate had to be higher.