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Your family business plans to buy a new building for AED 2,600,000. NBAD offers you...

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Accounting

Your family business plans to buy a new building for AED 2,600,000. NBAD offers you a 30-year loan with equal monthly payments and an interest rate of 7.5% per year. The bank requires that your firm pay 20% of the purchase price as a down payment. This means that you can borrow only 80% of the building value. Today, you have only AED 100,000 in your savings account, and NBAD can give you 5% return per year on your savings.

(a) Why do you think NBAD normally requires any borrower to pay 20% of the purchase price as a down payment?

(b) Explain the importance of the effect of compounding if you plan to save some money for the future.

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