Difference in effective annual rate or annual rate, Financial Management

Emily Jill Rogers  is planning to buy a house but needs assistance as to how she will finance the purchase. She has supplied you with some information and asked you to help her with several calculations.

a.   Price of house $550,000

b.   Emily's personal savings $150,000

c.   Her annual salary $96,000

d.  Bank rates of interest

1.   7% p.a. floating

2.   7.5% p.a. fixed for 3 years


  • In answering the following questions you should show your workings and or the calculator key strokes used.
  • Round your answers to two decimal places
  • You are permitted to make assumptions in arriving at your answer provided that you do not assume away details that have been provided as part of the question


a)  How much will Emily need to pay per month if she borrows the $300,000 needed to buy the house assuming a 20 year mortgage at the floating rate? (assume a table mortgage with principal and interest being repaid throughout the term of the loan)                                                                       

b)  How much will her monthly instalments be if she opted for the fixed term rate instead?              

c)  Explain to Emily the implications of the two options calculated in questions 2a and 2b.   

d) Assuming that Emily is only able to afford monthly repayments of $2,100, what is the maximum amount that she will be able to borrow? (assume a 20 year term using the fixed rate)      

e) Explain to Emily the difference between effective annual percentage rate and annual percentage rate. Which one is more important and why?                                                                      

f)  Assuming Emily chooses the option calculated in question 2b, what will she need to do at the end of year three and what will her principal outstanding balance be at that time?

Posted Date: 2/16/2013 12:15:35 AM | Location : United States

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