# Solved Question: Discussion with lenders indicates that a loan can be obtained for 75%

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## Description

Question:

Discussion with lenders indicates that a loan can be obtained for 75% of a property’s market value. Loan terms will probably be 8% interest, 20-year amortization (monthly payments), with the rate renegotiable after 7 years. The property is estimated to be worth \$200,000.

a) How much can be borrowed?

b) What will be the annual debt service?

c) What is the expected annual loan constant?

a)

Borrowing amount:

= \$200,000*75%

= \$150,000

b)

 Equal monthly payment [P×r×(1+r)^n]÷[(1+r)^n-1] Here, 1 Interest rate per annum 8.00% 2 Number of years 20 3 Number of compounding per annum 12 4 = 1÷3 Interest rate per period ( r) 0.67% 5 = 2×3 Number of periods (n) 240 Loan amount (P) \$                                                                                                 150,000 Equal monthly payment \$                                                                 1,254.66 150000*0.67%*(1+0.67%)^240)/((1+0.67%)^240-1)

Annual debt service = Equal monthly payment*12

= \$1,254.66

= \$15,055.92

c)

Annual loan constant:

= [Interest rate/12]/(1-(1/(1+[Interest rate/12])^n))*12

= [8%/12]/(1-(1/(1+[8%/12])^240))*12

= 10.04%

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