Muhammad Asef Khademi

Solutions:
1.What are the monthly payments for a 30-year traditional mortgage?
What are the payments for a 20-year traditional mortgage?
30 Years
PVA = C({1 – [1/(1 + r)] t } / r)
$22,000,000 = PMT{[1 – 1 / (1 + .061/12) 360] / (.061/12)}
PMT = $115,460.7

20 Years

PVA = C({1 – [1/(1 + r)] t } / r)

$22,000,000 = PMT{[1 – 1 / (1 + .061/12) 240] / (.061/12)}
PMT = $117,364
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2. Prepare an amortization table for the first six months of the traditional 30-year loan. How
much of the first payment goes toward principal?
Beginning Principal
Years Balance Total Payment Interest Payment Payment Ending Balance
1 22,000,000.00 115,460.75 111,833.33 3,627.42 21,996,372.58
2 21,996,372.58 115,460.75 111,814.89 3,645.86 21,992,726.72
3 21,992,726.72 115,460.75 111,796.36 3,664.39 21,989,062.33
4 21,989,062.33 115,460.75 111,777.73 3,683.02 21,985,379.31
5 21,985,379.31 115,460.75 111,759.01 3,701.74 21,981,677.57
6 21,981,677.57 115,460.75 111,740.19 3,720.56 21,977,957.01

3. How long would it take for S&S Air to pay off the smart loan assuming 30-year
traditional mortgage payment? Why is this shorter than the time needed to pay off the
traditional mortgage? How much interest would the company save?
Payments Every two weeks, 52/2=26
Bi-weekly payment = $115,460.7/ 2
Bi-weekly payment = $57730.35

PMT = PV x r (1 – 1/ (1+r) n)
Solving for n yields:
n =ln (1 – PV x r/PMT) / ln (1 + r)

In this case, the PMT is half of $115,460.7, or $57,730.35.

r is the biweekly interest rate = 6.1% * 14/365 = 0.234%.

n = ln (1 – ($22000000 x 0.234% / $57,730.35)) / ln (1 + 0.234%) = 632.97

It will take 633 biweekly periods or roughly 24.3 years (633/26). Less time is required
because technically, the company is making 26 half-payments per year.

Interest savings are the difference between total payments.

360 months x $115,460.7= $41,565,852
633 biweekly periods x $57,730.35= $36,543,311.55

Savings = $5,022,540.45

4. Assume S&S Air takes out a bullet loan under the terms described. What are the
payments on the loan? What is the amount of the last payment of the loan?

For the first 60 months, the payment will be the same as with the 30-year-fixed:
$133,317.17.

After that, the remaining bullet payment will be due which is equal to the present value of
the remaining principle of the loan:

PV = PMT (1 – 1/(1+r) t) / r = $133,317.17x (1 – 1/(1+0.061/12)360-60)/(0.061/12)

= $20,484,183.17.

The total payment, therefore, for the month 60th will be: Month 60 payment = $133,317.17
+ 20,484,183.17 = $ 20,617,500.34

5. What are the payments for the interest-only loan?

For the first 10 years (120 months), the payment will be the monthly interest:

$22,000,000 x (3.5%/12) = $641,666.7

However, the final payment will include both the interest and the entire principle:
$$641,666.7+ $22,000,000 = $22,641,666.7

6. Which mortgage is the best for the company? Are there any potential risks in this action?

Arguably speaking, in my opinion, the interest-only loan is better for the company to go
for, because it offers the lowest interest rate. However, it is somehow risky. One of the risks
associated with this is loan is that the company may not be able to pay the principle before
maturity, which is can be inferred that it may refinance at higher rate late on in the future.