On 1 January 2017, a company took out a bank loan for £600,000 + £3,000z. The lo

Question

On 1 January 2017, a company took out a bank loan for £600,000 + £3,000z. The loan is to be repaid by level monthly instalments with the first instalment to be paid at the end of January 2020 and the final instalment to be paid at the end of December 2029. The bank charged a rate of interest of 9% per annum convertible monthly The bank charged a rate of interest Calculate: (i) the amount of the level instalment paid; (ii) the capital outstanding on 1 January 2020; (ii) the total interest paid and the total capital repaid in 2020; (iv) the interest paid and the capital repaid in the final monthly ins talment.

Explanation / Answer

Total loan that company took = 600,000 + 3000*90 = 870,000

No interest is paid for 3 years. Interest rate is 9%. Total outstanding loan at the end of 3 years is 870,000*1.09^3 = 1,126,675

Now total tenure is 10 years = 120 months. To calculate the level instalment, input the following in the financial calculator

PV = 1126675; n=120; 1/y = 9/12; FV = 0; calculate PMT = 14,272

1) So level payments are 14272

2) Capital outstanding on 1 january 2020 = 1,126,675

3) Now with 14272 payments for 9 years, PV of the cash flow will be calculated as follows

PMT = 14,272; n=9*12; FV = 0; 1/y = 9%/12; calculate PV = 1,053,854

So Principle repaid in 2020 = 1,126,675 - 1,053,854 = 72,821.48

Total PMT payments made are 14,272*12 = 171,267

So Total interest payment is 171,267 - 72,821 = 98,445

4) Loan outstandgin just before the final payment can be calculated as follows

PMT = 14,272; n ==1 ; 1/y = 9%/12; FV = 0; calculate PV = 14,166

and PMT which is to be paid is 14,272. Thus out of this, 14,166 is the capital repaid and remaning 106 is the interest paid in the final monthly instalment.

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