Balloon Payments
Response to the following problem:
Mario Guiglini has just sold his hotel and purchased a restaurant with the proceeds. The restaurant is on the Riccione seafront in northern Italy. The cost of the restaurant to Mario is €500,000, and the seller requires a 25 per cent up-front payment. Mario is able to pay the up-front payment from the proceeds of the hotel sale. He needs to take out a mortgage, and has been able to arrange one with Unicredit Bank that charges a 9 per cent APR. Mario will make equal monthly payments over the next 30 years. His first payment will be due one month from now. However, the mortgage has an eight-year balloon payment option, meaning that the balance of the loan could be paid off at the end of year 8. There were no other transaction costs or finance charges. How much will Mario's balloon payment be in eight years?