Problem
A company can choose between a bullet loan and an equivalent amortized loan with a value of $5,750,000. Calculate the repayment cash flows for a five-year loan with a 3.25% pa fixed interest rate bullet loan and the equivalent amortized loan.
|
Year
|
Bullet loan repayments
|
Amortized loan repayments
|
|
3.25%
|
4.00%
|
3.25%
|
4.00%
|
|
1
|
?
|
|
?
|
|
|
2
|
?
|
|
?
|
|
|
3
|
?
|
|
?
|
|
|
4
|
?
|
|
?
|
|
|
5
|
?
|
|
?
|
|
Based on your calculations for the bullet loan repayments and amortized loan repayments, explain why the bank recommends that the amortized loan be taken. If interest rates increased to a 4.00% fixed rate, would that alter the bank's recommendation? If interest rates were expected to continue to rise would the bank preference change?