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Mini-Case

PART A

Owners of a new restaurant have found numerous costs associated with starting their business (see table). They financed the total of these costs with end-of-month payments through a loan from the bank at {E}compounded {F}, amortized over {G} years.

1. What is the size of the monthly payments required to settle this loan?

2. What is the principal balance outstanding on the loan after one year?

3. What is the size of the final payment?

4. Construct a partial amortization schedule for this loan.

PART B

After two years in business, the owners have saved (have a surplus of) {H}. They must decide if they will invest in property or investment bonds.

If they invest in a property and a vehicle, the total cost will be {I}, of which {H} will be required as a down payment. The fixed interest rate on the mortgaged amount is {J} compounded {F} for a term of {K} years.

5. What is the size of the semi-annual payments required to settle this mortgage?

6. What is the size of the final payment?

7. How long would it take (in months) to settle this loan with regular monthly payments of exactly $2000 instead of the PMT value calculated in Part 5?

PART C

If the owners choose to invest in bonds instead, they look at a {L} bond set to mature in {M} years with a bond rate of {N}, payable semi-annually. The market rate is {J}, compounded semi-annually. The owners will only purchase the bond if they can afford it with their savings ({H}), and they can get the bond at a discount because they think the market rate will go down, potentially making the bond more valuable in the future.

8. If the bond rate is {N}, will the bond be sold at a premium or a discount? Explain your answer.

9. Calculate the purchase price of the bond if it is purchased today ({M} years before maturity).

10. Do the owners have enough money to buy their bond? Will they make the purchase?

$44,000.00 $4,120.00 $2,000.00 $2,510.00 1.82% Cost of Goods Sold Equipment Renovations Other Financing interest rate Compounding periods per year (CY) Length of amortization (years) Savings/Surplus Property and vehicle cost Mortgage rate Term of mortgage Bond face value Time until maturity Bond rate {A} {B} {C} {D} {E} {F} {G} {H} {1} {J} {K} {L} {M} {N} semi-annually 3 $55,000.00 $198,000.00 1.5% 6 $60,500.00 2 2.4% $44,000.00 $4,120.00 $2,000.00 $2,510.00 1.82% Cost of Goods Sold Equipment Renovations Other Financing interest rate Compounding periods per year (CY) Length of amortization (years) Savings/Surplus Property and vehicle cost Mortgage rate Term of mortgage Bond face value Time until maturity Bond rate {A} {B} {C} {D} {E} {F} {G} {H} {1} {J} {K} {L} {M} {N} semi-annually 3 $55,000.00 $198,000.00 1.5% 6 $60,500.00 2 2.4%

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