A balloon payment is a loan where you pay small amounts of the loan first and then, at the end of the loan, you pay a BIG portion of the acquired debt to liquidate it. Many times, in this type of loan, you pay the interest of the loan first and then, in the last installment, you pay the last part of the interest and the principal. You and your business partners are contemplating the purchase of a commercial building. The conditions for the loan are: $900,000 principal on a 4-year term, with a loan with 7.9% interest, using a balloon payment method (ie., paying only the interest years 1-3 and the last portion of the interest and the principal in Year 4). You have secured a long-term debt with longer repayment provisions at a lower interest rate of 6.8%, that you can use right now to make the payments of the balloon payment loan. a) What immediate single payment (ie., present dollars) would be a fair offer to pay all the series of payments for the balloon payment? (Assume that you are going to use the new long-term loan that you secured at a lower interest rate to cover all the payments) b) Instead of using a balloon payment method, you will use equivalent uniform annual payments (ie., using the same 7.9% and 4-year term). What immediate single payment would be a fair offer to pay for all the series of uniform payments (Assume you will again use the same long-term loan)?
A balloon payment is a loan where you pay small amounts of the loan first and then, at the end of the loan, you pay a BIG portion of the acquired debt to liquidate it. Many times, in this type of loan, you pay the interest of the loan first and then, in the last installment, you pay the last part of the interest and the principal. You and your business partners are contemplating the purchase of a commercial building. The conditions for the loan are: $900,000 principal on a 4-year term, with a loan with 7.9% interest, using a balloon payment method (ie., paying only the interest years 1-3 and the last portion of the interest and the principal in Year 4). You have secured a long-term debt with longer repayment provisions at a lower interest rate of 6.8%, that you can use right now to make the payments of the balloon payment loan. a) What immediate single payment (ie., present dollars) would be a fair offer to pay all the series of payments for the balloon payment? (Assume that you are going to use the new long-term loan that you secured at a lower interest rate to cover all the payments) b) Instead of using a balloon payment method, you will use equivalent uniform annual payments (ie., using the same 7.9% and 4-year term). What immediate single payment would be a fair offer to pay for all the series of uniform payments (Assume you will again use the same long-term loan)?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A balloon payment is a loan where you pay small amounts of the loan first and then, at the end of the loan, you pay a BIG portion of the acquired debt to liquidate it. Many times, in this type of loan, you pay the interest of the loan first and then, in the last installment, you pay the last part of the interest
and the principal.
You and your business partners are contemplating the purchase of a commercial building. The conditions for the loan are: $900,000 principal on a 4-year term, with a loan with 7.9% interest, using a balloon payment method (ie., paying only the interest years 1-3 and the last portion of the interest and
the principal in Year 4). You have secured a long-term debt with longer repayment provisions at a lower interest rate of 6.8%, that you can use right now to make the payments of the balloon payment loan.
a) What immediate single payment (ie., present dollars) would be a fair offer to pay all the series of payments for the balloon payment? (Assume that you are going to use the new long-term loan that you secured at a lower interest rate to cover all the payments)
b) Instead of using a balloon payment method, you will use equivalent uniform annual payments (ie., using the same 7.9% and 4-year term). What immediate single payment would be a fair offer to pay for all the series of uniform payments (Assume you will again use the same long-term loan)?
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