Neville, another investor, has also purchased a PPP.

Again, the details for this product is repeated below:

• The PPP will pay out $102 after exactly one year, and then $102 another year after that.
• Exactly 1 year after the second payment of $102, the PPP will pay out a further payment of $223.
• There are no further payments after this payment of $223.

However, Neville also happens to be a high value client of GBW, and was able to negotiate a price of 345.96147587609 (and a corresponding yield of 9.8% p.a. effective) for his PPP.

Neville has also spoken to his financial advisor Luna about this product. Luna has advised him that the PPP will be treated as a loan product for tax purposes (i.e. GBW is considered to be borrowing money from Neville).

(a) Calculate the interest that GBW is being "charged" in the first year on this "loan". Give your answer in dollars, to the nearest cent. (2 marks)

(b) Using your result from part a) above, determine the "loan outstanding" immediately after Neville receives his first payment. Give your answer in dollars, to the nearest cent. (1 mark)

(c) Suppose GBW instead offers 3 level annual repayments to Neville (calculated at the same yield shown above). Ignoring time value of money and only considering this from (say) an accounting perspective, and without doing any further calculations, which of the following would be true?

a. GBW would end up paying less money to Neville in this level payment option.

b. GBW would end up paying the same amount of money to Neville in this level payment option.

c. GBW would end up paying more money to Neville in this level payment option.

d. There is no way to determine which of the two payment options will require GBW to pay more money without further information and/or actually performing the calculation.

Clear my choice

Answer rating: 100% (QA)

a To calculate the interest that GBW is being charged in the first year on this loan we need to dete... View the full answer