Question

1. Your friend has just purchased a house and has incurred a $150,000, 4.5% mortgage payable at $760.03 per month. After making the first monthly payment, he receives a statement from the bank indicating only $197.53 had been applied to reducing the principal amount of the loan. Your friend then calculates that at the rate of $197.53 per month, it will take 63 years to pay off the $150,000 mortgage. Discuss and explain whether your friend’s analysis is correct or not.

2. Discuss and explain why a company may choose to raise capital by issuing bonds instead of issuing stock.

Answer 1

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AS FOR GIVEN DATA...

I would say although my friend is correct with his calculation with the first month payment his entire calculation is not correct.Here,he must try to understand that interest will be calculated only Outstanding loan amount but not on entire loan amount i.e for the second month out of his payment of $760.03 the interest will be only $561.76[i.e ($150000-197.53)/12] and loan repayment will be $198.27[i.e $760.03-$561.76).This will be happened as the repayment in the every installment decreases the outstanding amount of loan.

Tenure of the loan:

(Principal×rate×(1+rate)^loanduration)/((1+rate)^loanduration-1)

By substing the value we get approximately 30 years for loan repayment.