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Thread: finance question -amortization and annuities

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    finance question -amortization and annuities

    can anyone give me a hint on what to do for this question..

    Geroge and mildred take out a loan for 150000 on Septemeber the first, 1988 with interest at 6.5% p.a compounding monthly starting on september 1 1988

    after exactly 10 years there is an interest rate increase of 1.35% to make the new interest rate 7.85% compounding monthly and the bank requires geroge and mildred to raise their monthly payment so that the loan will be completed in the original time

    After another four years in August 2002 mildred returns to work and geroge and mildred decide that with the extra income they will increase their monthly payment to $1230

    How much earlier than the original 20 years would the loan be completed by mildred's return to work?

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    Junior Member staree's Avatar
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    hint on annuities question

    OK, this reply raves on a bit.. you know how maths people can't stop once they start... so non-interested parties should skip to the next post...

    Here goes:

    They're just trying to put in a few twists and turns in the question to try to see if you can think clearly. You just need to break the question down into 3 steps:

    [Remember that when the question specifically tells you that the interest rates are 'compounding monthly', it wants you to work in months, so use the interest rate per month (the annual interest rates divided by 12) and the monthly payments in your annuity calculations.]

    Step 1 - Try to work out the monthly payment for a loan of $150000 using an annuity function for 240 (12*20yrs) months at 0.54% (6.5%p.a./12) of interest per month.

    Step 2 - This is, in effect, finding the new monthly payment at the higher interest rate that will maintain the same present value of future payments at 1/9/99.

    Work out the new monthly payment after 10 yrs at 1/9/99 by equating the original monthly payment from Step 1 times the annuity function for 120 months at the old interest rate per month against the unknown new monthly payment times the annuity function for the same 120 months at the new monthly interest rate.

    Step 3 - This is also trying to maintain the same present value of future payments at a certain date (this time, another 4 yrs later) by varying something else (this time, the question changes the monthly payment) by finding the new remaining term of the loan.

    Find the number of months that still need to be paid after Mildred goes back to work at August 2002 (14 years after the start of the loan), by equating the new monthly payment from Step 2 times the annuity function for the 72 months remaining at the new interest rate used in Step 2 against the final monthly payment of $1230 times the annuity function for the unknown number of months at the same new interest rate used in Step 2.

    Here's the easy part..

    You know that the whole term of the loan was 20 yrs (240 months).
    From Step 3, you've also got the actual term of the loan (after all those painful adjustments of interest rate, instalment amounts and term) by adding 120 mths (10 yrs) + 48 mths (4 yrs) + Part 3 answer in months.

    Wah-la!! The difference is the answer in months!
    Smile on the outside and laugh in the inside

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    geez Betty... your reminding me of just how little I remember from 4U Maths... hehehe *sigh*

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    Thankyou soooo much, finally i have answered it correctly!!!

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    Ive got no idea..is this in the 4u course...arent annuties in General.

    "O ye who believe! stand out firmly for God, as witnesses to fair dealing, and let not the hatred of others make you swerve to wrong or aviod justice. Be just: that is nearer to piety: and be conscious of God, for God is well-acquainted with all that ye do."

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    Gender: MALE!!! -=«MÄLÅÇhïtÊ»=-'s Avatar
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    I think u do this in 3 stages. Not a conventional 3u time payment ques...but doesnt seem hard, juz abit complicated in the wording.

    I havent actually done this, but i fink firstly, u juz apply time payments. Work out the original monthly repayment.
    So u know how much u still owe after 10yrs.

    2ndly, start a new time repayment from the yr of increased interest. You now have less repayments and a diff interest rate.

    3rdly, work out new monthly repayment. The after 4yrs, work out how much u have to pay back. Add $1230 to that repayment. Divide the amount owing by the new amount of monthly repayment to work out number of months. Find the difference between that number and the number of months orginially left (i fink its 6x12?). And that's how much earlier.

    sowie if this is exactly the same as wat staree said, kinda busy and didnt read wat he/she said coz too long
    -= im a guy!!!!!!!!!!! =-

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