PRACTICE EXERCISE

Michael secures a $30,000 loan from the New York City Bank in order to purchase a house. The New York City Bank charges an interest of 7.54% per year and payment is expected on a biweekly basis (i.e. 26 times per year) and it is expected to be paid within 4 years. The loan is interest only for the first year - meaning that the $30,000 principle will remain the same after the first year - after which the loan converts to a principle and interest loan.

Simultaneously, Michael secures another $10,000 loan for travel from the same bank, which charges a higher rate of interest (10.08%) per year. Michael is expected to repay the loan with a $300 monthly instalment, which commences in one month's time. and until the loan's retirement.

a) What is the total amount that Michael owes 2 years after the loan purchases? Show your calculations.

b) Michael is expected to pay The New York City Bank $600 to convert his $30,000 house loan from interest only to a principle and interest loan. The fee is also paid at the same time of his first principal and interest payment (i.e. the 27th payment).

Given the above, what is the effective interest rate that Michael is paying on his loan loan? Show your calculations. [Tip: Applying the Internal Rate of Return may help.]

I worked out the fortnightly payments for the house loan ($87.00) for the first year, and once the loan is converted to principle and interest, the fortnightly payments will amount to $430.31.

Help with combing the ingredients to answer these Qs will be so warmly welcomed!