QM 2009 Exam
QM 2009 Exam
QM 2009 Exam
SECTION B
Attempt EITHER Question 1 OR Question 2
Question 1
A local business is to purchase a warehouse for $3 000 000. They find a bank that is willing to
lend the amount at an interest rate of j 12 = 8.1% p.a., with the business agreeing to pay back the
loan by making equal monthly repayments (at the end of each month, beginning in a month's
time) for 5 years.
d After two years, due to tight monetary policy, the interest rate applicable to the loan rises to
j12 = 9.6% p.a. Determine the new monthly repayments are required (i.e. for payments 25 to
60) in order to pay the loan off in a total of 5 years.
[7 marks]
e If the business does not change the size of its monthly repayments, determine how many
more repayments it will take to pay off the loan.
[4 marks]
[Total : 25 marks]
a) Time line diagram :
$3 000 000 $0
(PV) (FV)
R R R R R R
|_____|_____|_____|____....... _____|_____|_____|
0 1 2 3 58 59 60
c)
PV(of debt with 3 payments to go) = $60 972.86 [1 - 1.00675-3]
2
0.00675
= $ 180476.68
Amortisation table :
Month Monthly Interest on Decrease in Outstanding
Payment OP OP Principle
57 $60,972.86 $180,476.68
58 $60,972.86 $1,218.22 $59,754.64 $120,722.04
59 $60,972.86 $814.87 $60,157.99 $60,564.05
60 $60,972.86 $408.81 $60,564.05 $0.00
Example calculations:
d)
OP = PV(of debt with 60-24=36 payments to go) = $60 972.86 [1 -
1.00675-36]
0.00675
= $1 942 892.54
R = $62 327.44
Thus the new monthly repayment must be $62 327.44 per month.
That is, 36 more full payments and a partial payment will be required.
3
Question 2
Jane is living in rented accommodation but is thinking about buying a house. She is paying $320
per week in rent, and can afford to commit up to $400 per week on accommodation. Buying a
house will cost her $170,000. If she can save a deposit of at least $10,000 she will be able to
borrow from the XYZ bank at an interest rate of j52 = 10.40% p.a. Savings at the XYZ bank
earns interest at j52 = 4.68% p.a.
Jane decides to deposit $80 every week into a savings account until she has saved at least
$10,000. (The first deposit will be made in one week’s time, and interest be earned at j52 = 4.68%
p.a.) As soon as she has saved at least $10,000, she will borrow enough money to make up the
$170,000 required to buy the house. The following week she will commence repayments of $400
a week, with interest charged at j52 = 10.40% p.a.
NB Assume that there is no inflation with respect to housing prices. That is, the price of the
house will be $170,000 regardless of when it is purchased.
[3 marks]
b Determine how many weeks it takes until Jane has saved at least $10,000.
[5 marks]
c Determine how much Jane will have saved by then. [NB Assume that Jane’s last deposit is
NOT a partial deposit – that her savings will not be exactly $10,000, but rather a little more
than $10,000.]
[6 marks]
d Thus determine how much she needs to borrow in order to have the $170,000 required to buy
a house.
[2 marks]
e Determine how many repayments it will take to pay back this loan.
[5 marks]
4
f If you have no deposit, the XYZ bank charges interest at a rate of j52 = 10.92% p.a. Briefly
explain (one or two sentences) why a borrower with no deposit might be subjected to a
higher interest rate.
[4 marks]
[Total : 25 marks]
a) FV*≈ 10000
80 80 80 80
|_______|_______|___..___|_______|
0 1 2 n-1 n weeks
PV=170000-FV*
|_______|_______|____..__|
_______|_______|
0 1 2 N-1
N N+1 weeks
c)
e)
= - ln(1-159956.27*0.002/400) / ln(1.002)
= 804.976535