Question 3

Suppose you work at the help desk of Daffodil Bank. Your job Is to help customers choosing the right financial product. Currently you are dealing with a customer who Is seeking a loan to buy a car costing $45.000 inclusive of GST. The customer owns a small business and she wants to buy the vehicle for business use only. Daffodil currently offers the following two financing arrangements for this type of customers:

She can borrow the money as a consumer loan. All Daffodil consumer loans are fully amortizing loans. Interest rate Is 10.25% per annum fixed for the term of the loan.

Or

She can buy the car under a hire-purchase agreement since she is currently running a business. Under a hire-purchase agreement, interests are pre-computed at 10.25% per annum. Hire purchase loans are available for business purchases only. If the customer is buying the vehicle for her business, she is eligible to apply for this finance arrangement.

Following terms and conditions apply to both loan arrangements: balloon payment Is available up to 20% of the value of the vehicle; a once-off application fee of 5125 apply: term of the loan is up to 5 years.

The customer wants to pay a down payment of 10% of the car value and balloon 10% of the loan size. She wants to pay off the loan in equal monthly payments over 5 years starting one month after the loan issue. She does not want to add up the application fee to the loan amount.

The customer requires you to answer the following questions.

A. How much she has to pay at Me end of each month over the term of the loan under both  loan arrangements (amortizing and pre-computed)?

B. What is the total amount outstanding (total amount the customer owes to the bank) at the beginning of 30" period under both loan arrangements?

C. What is the amount of interest payable with the 40,^ payment under both loan arrangements?