Question 1 – Which is the better loan?
Joey Wombat, requires $40,000 to renovate and upgrade her kitchen and bathroom at her house.
Therefore, Joey is considering taking a 5-year loan for the required amount. The options Joey faces
are as follows:
1. Major bank charges 7.8% per year compounding quarterly and requires quarterly principal
and interest repayments.
2. Minor bank offers a one-year interest-only option with her five-year loan, but charges a rate
of 7.95% p.a. compounded quarterly. This means that for the first year, every quarter Joey
would pay only interest on the amount borrowed. Loan repayments consisting of both
interest (compounded quarterly) and principal would then commence in year two and
continue for four years.
(a) Calculate the quarterly principal and interest repayment that Joey would have to make on both
If you wish, use EXCEL to calculate the quarterly repayment. EXCEL Instructions: Refer
to Topic 4 in the EXCEL booklet for instructions on how to use financial functions to make
annuity calculations.
(b) Use EXCEL to set up an Amortisation Schedule for both loans. Include your completed
EXCEL amortisation schedule.
EXCEL Instructions: Refer to your amortisation notes from Week 3 and the corresponding
EXCEL spreadsheet available on the course website, which you can modify to help you create
the amortisation schedule for this question. Be sure to add your initials to all column names.
You need to use formulas, do not simply type in values! Therefore you need to show the
formulas in your spreadsheet in this form B4=B3*$C$1.
(c) Use your amortisation schedule from part (b) to calculate the total interest and the total amount
paid over the life of both of the loans.
(d) Which option should Joey Wombat take? As part of your response evaluate whether Joey has
sufficient funds now to make quarterly payments, or whether Joey may not sufficient money
just yet. You must explain why the option you select is the better of the two alternatives.