Could you answer Question 3, and theinformation about question 1 has been given.

Question 1

Bill has bought a new home in Canberra. He borrowed $600000 at arate of 3.5% p.a., which is to be repaid in annual instalments overa thirty year period. The first instalment is due on 19 March2020.

What are Bill’s annual repayments? the annual repaymentis  $32622.8

Question 3

The recently released recommendations of the Banking RoyalCommission (the Royal Commission into Misconduct in the Banking,Superannuation and Financial Services Industry) include theelimination of commission pay- ments to mortgage brokers.

Returning to the details of question 1 above: Theresa was Bill’smortgage broker. Bill’s bank will pay her commission amounts of $1000 annually from 19 March 2020 through to 19 March 2049(inclusive).

If we view the bank’s mortgage business as making neither aprofit nor a loss, then (in the absence of any internal capitaltransfers) Theresa’s com- mission payments have to effectively comefrom Bill.

a. As at 19 March 2019, what is the total value of Theresa’scommission (use a valuation interest rate of 3.5% p.a.)?

If the value of Theresa’s commission comes from Bill, then thetotal amount of Bill’s loan is $600 000 plus your answer to part aabove. But Bill’s pay- ments are only of an amount calculated byyou in question 1 above. This suggests that the effective interestrate the bank requires on its funds is not the 3.5% p.a. that itcommunicates publicly.

b. Is the effective interest rate that bank requires on itsfunds higher or lower than the 3.5% p.a. that it communicatespublicly? Why?

c. Calculate the effective interest rate discussed in part babove. Carefully explain how you reached your answer.

d. If Bill had been offered the effective rate discussed in partb above, by how much would his annual payments increase ordecrease?