Homework Help: FIN

Posted by HELP on Sunday, August 26, 2007 at 7:08pm.

After 12 months of making extra payments, what will be the loan balance? After 12 months of making the regular
payment and investing the $50, what will be the loan balance?
Under the regular payment and investing option, excluding the tax due on the interest earned, what is the investment balance after 12 months? Compare the scenarios of investment versus prepayment by examining the 60th payment, which occurs at the end of the fifth year. What is the difference between the (a) interest portion of that payment, (b) tax deduction for interest, and (c) principal balance? Finally, how much is in the investment account? (a) How long does it take to repay the entire loan under the prepayment option? (b) What is the total interest paid over the life of the loan? Compare the total interest paid under each scenario? How much less in interest do you pay under the prepayment option?

Loan Balance: $135000
Current Payment: $990.62
Additional Payment: $50.00
Loan Interest Rate: 8.0%
Loan Interest Deductibility: YES
Investment Rate Return: 6.00%*
Tax Bracket: 30.00%
Investment Type: After-Tax

FIN - economyst, Tuesday, August 28, 2007 at 11:48am
An EXCEL spreadsheet is very helpful for these types of problems. Just set it up. eg., the balance formula (no extra payments) is: B1 = (B0-P)*(1+.08/12)

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