Lee and Kerry borrow $400,000 from the TasWide bank, to be paid back through monthly repayments over 15 years, with the first repayment to occur one month after taking out the loan. TasWide charges at interest j12 = 6.0% p.a. Under the terms of the loan, Lee and Kerry will pay interest only for the first 3 years of the loan. At that point the loan will change to a fully amortized (principal and interest or P&I) loan, which will apply for the final 12 years of the loan's duration.

a) Illustrate the cash flows associated with loan as a fully labelled timeline diagram. 

b) Find the Outstanding Principal immediately after Lee and Kerry's 177th repayment. 

c) Construct an amortization schedule showing the last 3 repayments.

d) Describe and perform and sanity check on your amortization schedule. 

e) If Lee and Kerry simply took out a 15 year P&I for $400,000 at j12 = 6% p.a. and intended to make monthly repayments of $1900, attempt to determine how long they would take to pay off the loan. 

Explain why your attempt to answer the question was problematic?

Answer rating: 100% (QA)

a The cash flows associated with the loan can be illustrated as follows Year 0 Loan Amount 400000 Ye... View the full answer