An institutional lender is willing to make a loan for $1 million on an office building at a 10 percent interest (accrual) rate with payments calculated using an 8 percent pay rate and a 30-year loan term. (That is, payments are calculated as if the interest rate were 8 percent with monthly payments over 30 years.) After the first five years the payments are to be adjusted so that the loan can be amortized over the remaining 25-year term.
a. What is the initial payment?
b. How much interest will accrue during the first year?
c. What will the balance be after five years?
d. What will the monthly payments be starting in year 6?