Jack and Jill Trzetrzelewska want to purchase an apartment for $160,000. First Australia Bank (FAB) will lend them the required funds at a fixed interest rate of 9% per annum for a 25-year period, with interest compounded on the monthly balance outstanding. The monthly payments will begin in one month's time and all cash flows will occur at the end of each month.

a) Suppose it is now the end of year 10 (that is, 120 months have elapsed since the funds were first borrowed) and Jack and Jill have decided to repay the amount outstanding in full. What amount do they now need to pay the bank? Assume that Jack and Jill have been making regular monthly payments over the past 10 years. Show all calculations.

b) What is the effective annual interest rate that Jack and Jill are paying on their loan?

Answer rating: 100% (QA)

Lets solve part a first a To find out how much Jack and Jill need to pay the bank at the end of year ... View the full answer