[yuke78]

Hi Ninjas,

I was asked a question that isn’t directly from the MCQ but challenged my understanding of the interest calculation method. I was given the following scenario:

A bank loan was granted to a company with a stated rate of 6.5% APR, and principal of $1,000,000 on Jan. 1, 2015, for a period of 10 years. Interest is compounded monthly. Monthly payments are $11,354.80.

However, the twist is that the payments for principal and interest do not begin until Jan, 1, 2016. My initial reaction is that this is similar to a deferred rent type of problem where you received the benefit and there is an effective interest component, I just don’t know how to go about solving this problem.

Any idea?!?

[monikernc]

isn't this a regular annuity with payments at the end of a period rather than an annuity due which would have payments made at the beginning of a period?

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[yuke78]

That just makes the difference of 1 month, right? It really comes down to, how do you recognize the interest expense in year 1. You have the funds and there is an interest element to assign much like there would be in a “free rent” scenario. I just don't know how to solve since the interest element is more complicated than amortizing rent.

[monikernc]

i really don't know – but i would think your new present value is the principal + interest that accrued the first year. then plug in with the monthly interest rate and payments over 120 months to solve for the rate. play with it in excel and see what you get.

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[Author]

Replies