Assignment Calculations

Posted: August 26th, 2021

Assignment Calculations

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Assignment Calculations

Question 1

1. Amortization Schedule Showing First and Last 6 months of the payment schedule

Details

Cost of purchase = $700,000

Available Amount = $ 200,000

Payment Deficit = $ 500,000, which is the loan amount.

Interest rate = 2.0% per annum, compounded monthly, per month interest => 2.0%/12 =0.17%

Period of payment = 20 years, or 240 months.

Table 1: Loan Details and Summary

Loan Details
	Loan amount	$500,000.00
	Annual interest rate	2.00%
	Loan period in years	20
	Start date of the loan	6/28/2020
Loan Summary
	Monthly payment	$2,529.42
	Number of payments	240
	Total interest	$107,060.00
	The total cost of a loan	$607,060.00

Table 1 shows the loan details and summary. The expected monthly payment is $ 2,529.42, with a total interest amount of $ 107,060.00 at the end of 240 months or 20 years. Therefore, the total cost of the loan is $ 607,060.00. The following is an amortization schedule showing the first and last 6 months’ payment. The complete schedule is shown in excel (Question 1 (a)).

Table 2: First 6 Months Payment Schedule

Pmt No.	Payment Date	Beginning Balance	Payment	Principal	Interest	Ending Balance
1	7/28/2020	$500,000.00	$2,529.42	$1,696.08	$833.33	$498,303.92
2	8/28/2020	$498,303.92	$2,529.42	$1,698.91	$830.51	$496,605.01
3	9/28/2020	$496,605.01	$2,529.42	$1,701.74	$827.68	$494,903.26
4	10/28/2020	$494,903.26	$2,529.42	$1,704.58	$824.84	$493,198.69
5	11/28/2020	$493,198.69	$2,529.42	$1,707.42	$822.00	$491,491.27
6	12/28/2020	$491,491.27	$2,529.42	$1,710.26	$819.15	$489,781.00

Table 2 is an amortization schedule showing payment for the first six months. The payment period begins on 28^th July 2020 with a principal amount of $ 1,696.08 and an interest amount of $ 833.33 on reducing balance. Next is the payment schedule for the last six months as shown in Table 3 below;

Table 3: Last 6 Months Payment Schedule

Pmt No.	Payment Date	Beginning Balance	Payment	Principal	Interest	Ending Balance
235	1/28/2040	$15,088.36	$2,529.42	$2,504.27	$25.15	$12,584.09
236	2/28/2040	$12,584.09	$2,529.42	$2,508.44	$20.97	$10,075.65
237	3/28/2040	$10,075.65	$2,529.42	$2,512.62	$16.79	$7,563.03
238	4/28/2040	$7,563.03	$2,529.42	$2,516.81	$12.61	$5,046.21
239	5/28/2040	$5,046.21	$2,529.42	$2,521.01	$8.41	$2,525.21
240	6/28/2040	$2,525.21	$2,529.42	$2,525.21	$4.21	$0.00

            The last six months’ payment schedule begins at month 235 dated 28^th January 2040 and ends on 28^th June 28, 2020. The respective details of interest amount, principal value, and anticipated payment, as shown in Table 3.

• Study of Offers from DBS and OCBC (Fixed and Floating Rates)

            Assessment of fixed and floating rates for the two loan providers are as follows;

Loan for Home	Fixed Rates	Floating Rates
DBS Loan	1.95%	Pegged to the FHR8 (no SIBOR)
OCBC Loan	1.95%	Pegged to a 3M SIBOR/6M SIBOR/Board rates

            Floating rate packages are based on fluctuating benchmarks such as “MRP,””SIBOR,” or “FHR” which are often cheaper yet highly volatile. On the contrary, fixed rates do not fluctuate within the first periods. The current floating interest rate for DBS is pegged on FHR8 and no SIBOR, whose floating rate package is rated at 2.07% without lock-in. The OCBC floating rate is pegged on 3M SIBOR/6M SIBOR/Board rates, where board rates are 1% 3M SIBOR is 1%, amounting to 2%. Using a loan calculator, repayments are based onthe DBS float interest rate of 2.07% (MONEYSMART, 2020). While OCBC has a floating rate of 2.0% (OCBC Bank, 2020).But the amount of the loan is $ 500,000. Therefore, with a fixed interest rate of 1.95% per annum the number of months would be calculated as follows;

. The repayment amount in the case of DBS is as follows;

In the case of OCBC, with the amount borrowed is $ 500,000, and the interest rate (fixed) is 1.95% for 20 years, the following will be the repayment amount per month.

Thus, the cheapest loan would be that of OCBC if taking a floating interest rate at 2.0%. However, the two providers’ cost of a loan based on a fixed interest rate is equal at 1.95%.

Question 2: Net Present Value (NPV)

The net present value demonstrates the differences between the present value of cash flow and cash outflow for a project based on a specific period (Magni, 2007). In this assessment, the two projects are A and B that are expected to run for 3 years. The following formula can be utilized in calculating net present value of a project with multiple cash flows;

, whereby R_t refers to the net cash inflow per period, t and iis the interest rate (Magni, 2007). Thus, the following table shows a comparative assessment of the two projects, given an interest rate of 7% per annul

Table 4: Net Present Value Calculations for Plant A

	Cash Flow
Year	Plant A
	Cash Flow	Present Value
0	-90,000
1	45,000
2	55,000
3	50,000

From Table 3, the present value for the plant is $ 130,910.095; hence the net present value will be;

For Plant B, the following are the calculations;

Table 5: Net Present Value Calculations for Plant B

	Cash Flow
Year	Plant A
	Cash Flow	Present Value
0	-50,000
1	30,000
2	37,000
3	28,000

From Table 4, the present value for the plant is $ 88,210.95; hence the net present value will be;

Therefore, although the two plants yield a positive return, Plant A has the highest return compared to Plant B. Hence, the company should choose Plant A.

Question 3

Question (a): Number of Payments Required

The formula to calculate the amortization payment amount per period is:

Given loan amount, A = $ 55,000 and interest rate, r = 5% per annum compounded monthly and monthly repayment = $ 1,100 the number of payments, substituting the values into the above formula,  n would be;

Rewrite the equation with

Solve: ,

Substitute:

 , therefore, solving for n: . Convert into years it will be 56.18/12 is equivalent to 4.68 years.

Question (b): Number of Payments Required

Amount required = $ 19,000

Amount paid = $ 10,000

Balance = $19,000 – $10,000 = $ 9,000

Interest rate (Compounded) = 18%

Period = 5 months

The formula for future value earning compounded interest is as follows: . Modifying the formula to account the second payment and substitute the value, the following is obtained;

Hence, the second payment will amount to $ 10,951.57.

Question 4: Global Financial Crises in 2008 and Discuss In What Ways Asymmetry Information Played A Role in the Crises

The 2008 global financial crisis occurred between late 2007 and early 2009. The United States housing markets experienced financial depressions, which contributed to financial crises that went beyond boundaries to become a global crisis in the financial sector as the global financial systems because of linkages (Cespa&Viver, 2017). Therefore, economy experienced prolonged three-year depression.

Information Asymmetry

Information asymmetry influences the behavior of security markets. It occurs when during a transaction, one party hasthe advantage of access to more information about market behavior than the other; thus, capable of making highly informed decisions (Thai Ha Nguyen et al., 2020). When purchasing or selling financial security, for instance, asymmetric information is evident in situations where either seller or buyer has detailed information on the future, present or past performance of the underlying financial security (Kirabaeva, 2010;Cespa&Viver, 2017). Therefore, a party with more information has a better opportunity to understand how best to benefit from the sale or purchase compared to one with limited access to information.

Consequently, information asymmetry has led to two significant issues, which include adverse selection and moral hazard. In the case of adverse selection, investors fail to differentiate between low and high-risk borrowers (De Donder, Philippe &Hindriks, 2009; KAPLAN Higher Education Study Guide). As such, they will tend to provide unsubstantiated loans since they are not adequately informed on the quality of the borrowers (De Donder, Philippe &Hindriks. (2009).Thus, borrowers hold the incentive to initiate riskier projects; they are likely to default on loans.  More so, moral hazard is exhibited when actions were undertaken by the people in a transaction that disadvantages or makes the other party worse off (KAPLAN Higher Education Study Guide). That is, borrowers can default on loans through engaging in immoral activities. Therefore, the two aspects were key in influencing financial crisis in the U.S as most financial institutions continued to lend money to borrowers that were not adequately verified to understand their repayment capability. In the end, banks and other financial markets experienced large number of defaulters that eventually hampered market financial performance.

References

Cespa, G. &Viver, X. (2017). High-frequency trading and fragility. ECB Working paper 2020, February 2017. Retrieved on 28^th June 2020 from https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp2020.en.pdf

De Donder, Philippe & Jean, Hindriks. (2009). Adverse Selection, Moral Hazard, and Propitious Selection. Journal of Risk and Uncertainty. https://doi.org/38. 73-86.10.1007/s11166-008-9056-7.

Kirabaeva, K. (2010). Adverse Selection, Liquidity, and Market Breakdown. Working paper, Bank of Canada. Retrieved on 1^st Juley 2020 from https://www.bankofcanada.ca/wp-content/uploads/2010/12/wp10-32.pdf

Magni, Carlo. (2007). Project valuation and investment decisions: CAPM versus arbitrage. Applied Financial Economics Letters. 3. 137-140. https://doi.org/10.1080/17446540500426821.

MONEYSMART (2020). DBS Home Loan. Retrieved on 28^th June 202 from https://www.moneysmart.sg/home-loan/dbs-ms

OCBC Bank (2020). OCBC Personal Banking: Home loan’s new purchase. Retrieved 28^th June 2020 from https://www.ocbc.com/personal-banking/loans/new-purchase-of-hdb-private-property

KAPLAN Higher Education Study Guide: Foundation Mathematics for Business, 215-229. Retrieved on 1^st July 2020 from https://we.tl/t-hZVyq1j3c4

Thai Ha Nguyen, T., Moslehpour, M., Thuy Van, T. & Wing-Keung, W. (2020). State Ownership and Risk-Taking Behavior: An Empirical Approach to Get Better Profitability, Investment, and Trading Strategies for Listed Corporates in Vietnam. Economies 2020, 8(2), 46; https://doi.org/10.3390/economies8020046