Financial Management Tutorial 5 2022
Amortization and Sinking Funds
Please ensure that you have attempted all the questions in this tutorial before you
come for final examinations.
1) You purchase an apartment for $180 000 with a down payment of $45 000. You
secure a mortgage bond with a bank for the balance at 18% p.a. compounded
monthly, with a term of 20 years.
a) What are the monthly payments?
b) Draw up an amortization table for the first six payments of the loan, and one for
the last six payments (that is 235th to the 240th payments).
2) Draw up an amortization table for a loan of $4 000 for three years at 12% per annum
compounded half-yearly and repayable in six half-yearly payments. How much
interest will you pay over the life of the loan?
3) Mr. Wheel and Deal wishes to borrow $50 000 for five years for a business venture.
The Now Bank is willing to lend him the money at 15% p.a. if the debt is amortizes
by equal yearly payments. On the other hand, the Yesterday’s Bank will lend the
money at 14% p.a. provided that a sinking fund is established with it on which it will
pay 11% p.a. to accumulate the principal by the end of the term, with equal annual
deposits. What is the difference in total annual payments between the two plans?
4) Jonathan purchases an apartment by making a down payment of $60 000 and
obtains a 20-year loan for the balance of $120 000 at 20% p.a. compounded
monthly. After four and a half years the bank adjusts the interest rate to 18%.
a) What is the new amount that he must pay if the term of the loan remains the
same?
b) If we assume that the interest rate of 20% p.a. will remain fixed over the 20-year
period, what is the total amount Jonathan pays back to the bank?
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c) Again assuming a fixed interest rate of 20% p.a. for the full term of the loan, what
is the total real cost of the loan if the expected average rate of inflation over the
term of the loan is 10% per year?
5) Edgar, a dynamic young executive, calculates that he can sell his house so as to
have $180 000 available for a down payment on a new house. The price that the
seller is willing to accept for Edgar’s dream house is $760 000. To this Edgar will
have to add an extra $52 000 made up of estate agent’s duties, transfer fees and the
premium on an insurance policy that will cover the outstanding principal owed in the
event of Edgar’s death. His company will pay him a housing subsidy of $1 700 per
month and also has sufficient financial leverage to secure him the necessary
mortgage bond at 18% p.a. (compounded monthly) for a period of 20 years.
Assuming that Edgar is, for the next few years, willing to commit himself to up to a
third of his gross monthly salary of $21 000, should he buy or not?
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