Reference no: EM133176531

Question - Freddie decides to buy the fleet of vehicles after all, for a price of $515,000. Freddie's friend Kiki, who is an executive at "Mercury Bank", has arranged a special interest rate of 2.4% p.a. compounding monthly for Freddie to take out a loan for this purchase.

Freddie is considering taking this special offer, and intends to fully repay the loan using level monthly repayments over the coming 8 years. The first payment is exactly one month from today.

(a) Calculate the size of the level monthly repayment. Give your answer in dollars, to the nearest cent.

(b) What is Freddie's loan outstanding after 1 year? Give your answer in dollars, to the nearest cent.

(c) Calculate the interest Freddie is charged in the first year. Give your answer in dollars, to the nearest cent.

(d) Suppose Freddie was charged a higher interest rate for the loan than what Kiki had arranged. Assuming Freddie is still borrowing the same amount and making level repayments over 8 years at the same points in time (but a different amount due to the different interest rate), which of the following statements about the total interest Freddie pays in the first year is true?

a. The total interest in the first year will be lower than the answer in part c), as the higher monthly repayments will pay off the principal sooner, meaning less interest is charged.

b. The total interest in the first year will be higher than the answer in part c), as the interest rate is higher and nothing else about the loan has changed (apart from the repayments).

c. The total interest in the first year will be exactly equal to the answer in part c), as the increase in the repayments will compensate any extra interest charged.

d. We cannot determine anything about the interest in the first year without knowing the exact interest rate and performing a calculation.