Question 1

a)

$1,600,000 x 80% = $1,280,000

Instalment payment yearly:

PVA = PMT X PVIFA
12 % 25 years


PMT = $1,280,000/7.8431

= $ 163,200.78

Interest for 1
st
year:

$1,280,000 x 12% = $153,600

Principal payment 1
st
year:

$163,200.78 - $153,600 = $9600.78

Ending balance for 1
st
year:

$1,280,000 - $9600.78 = $1,270,399.22

Interest for 2
nd
year:

$1,270,399.22 x 12% = $152,447.91

Principal payment for 2
nd
year:

$163,200.78 - $152,447.91 = $10,752.87

Ending balance for 2
nd
year:

$1,270,399.22 - $10,752.87 = $1,259,646.35

Interest for 3
rd
year:

$1,259,646.35 x 12% = $151,157.56

End of Year Instalment
Payment
Interest Principal
Payment
Ending
Balance
0 $1,280,000
1 $163,200.78 $153,600 $9600.78 $1,270,399.22
2 $163,200.78 $152,447.91 $10,752.87 $1,259,646.35
3 $163,200.78 $151,157.56 $12,043.22 $1,247,603.13
4 $163,200.78 $149,712.38 $13,488.40 $1,234,114.73
5 $163,200.78 $148,093.77 $15,107.01 $1,219,007.72
Total $816,003.90 $755,011.62 $60,992.28
Principal payment for 3
rd
year:

$163,200.78 - $151,157.62 = $12,043.22

Ending balance for 3
rd
year:

$1,259,646.35 - $12,043.22 = $1,247,603.13

Interest for 4
th
year:

$1,247,603.13 x 0.12 = $149,712.38

Principal payment for 4
th
year:

$163,200.78 -$149,712.38 = $13,488.40

Ending balance for 4
th
year:

$1,247,603.13 - $13,488.40 = $1,234,114.73

Interest for 5
th
year:

$1,234,114.73 x 12% = $148,093.77

Principal payment for 5
th
year:

$163,200.78 - $148,093.77 = $15,107.01

Ending balance for 5
th
year:

$1,234,114.73 - $15,107.01 = $1,219,007.72


b)
End of Month Instalment
Payment
Interest Principal
Payment
Ending
Balance
0 $1,280,000
1 $8,362.81 $5,205.33 $3,157.48 $1,276,842.52
2 $8,362.81 $5,192.49 $3,170.32 $1,273,672.20
3 $8,362.81 $5,179.60 $3,183.21 $1,270,488.99
4 $8,362.81 $5,166.66 $3,196.15 $1,267,292.84
5 $8,362.81 $5,153.66 $3,209.15 $1,264,083.69
Total $41,814.05 $25,897.74 $15,916.31

$1,600,000 x 80% = $1,280,000

20 years x 12 = 240 months

PVA = PMT X PVIFA
4.88% 240 months


PMT = $1,280,000 x PVIFA
4.88% 240 months


= $8,362.81

Interest for 1
st
month:

($1,280,000 x 4.88%)/12 months = $5,205.33

Principal payment for 1
st
month:

$8,362.81 - $5,205.33 = $3,157.48

Ending balance for 1
st
month:

$1,280,000 - $3,157.48 = $1,276,842.52

Interest for 2
nd
month:

($1,276,842.52 x 4.88%)/12 = $5,192.49

Principal payment 2
nd
month:

$8,362.81 - $5,192.49 = $3,170.32

Ending balance for 2
nd
month:

$1,276,842.52 - $3,170.32 = $1,273,672.20

Interest for 3
rd
month:

($1,273,672.20 x 4.88%)/12 months =$5,179.60


Principal payment for 3
rd
month:

$8,362.81 - $5,179.60 = $3,183.21

Ending balance for 3
rd
month:

$1,273,672.20 - $3,183.21 = $1,270,488.99

Interest for 4
th
month:

($1,270,488.99 x 4.88%)/12 months = $5,166.66

Principal payment for 4
th
month:

$8,362.81 - $5,166.66 = $3,196.15

Ending balance for 4
th
month:

$1,270,488.99 - $3,196.15 = $1,267,292.83

Interest for 5
th
month:

($1,267,292.83 x 4.88%)/12 months = $5,153.66

Principal payment for 5
th
month:

$8,362.81 - $5,153.66 = $3,209.15

Ending balance for 5
th
month:

$1,267,292.83 - $3,209.15 = $1,264,083.68



c) I will choose Bank B to loan the remainder amount. Their interest is lower and the
principal payment is also lower. It is less taxing to repay the loan as compare to Bank A.
Question 2

A bond is a debt instrument issue by a company, organization or government. (Schroders
plc, 2014) When large organisations need to raise money for their big projects or
investments, they require big sum of funds that is more than what a bank can offer. Hence,
they raise these funds by issuing bonds to public. (Investopedia US, A Division of IAC., 2014)
The issuers of a bond will have to pay the investors with interest payments when the bonds
mature. These interests are made at a predetermined rate and schedule and the interest
rate is known as the coupon. When the bond reaches it maturity date, the issuer has to
repay the amount. Bonds are also referred as fixed-income securities as the investor will
know the exact amount they are getting back. (Investopedia US, A Division of IAC., 2014)

On the other hand, stocks are shares in the ownership of a company. Having a share in the
company shows that you have a claim on the companys assets and earnings. The more
stock you have, the greater your ownership stake in the company. (Investopedia US, A
Division of IAC. , 2014) Companies issuing stock is known as equity financing and it is
advantageous for the company as it does not requires the company to pay back the money
and interest. The firs sale of a stock issued by the private company is known as initial public
offering (IPO). (Investopedia US, A Division of IAC. , 2014)

One of the main differences between bonds and stock are that bonds have a maturity date
whereas stock do not have. Bonds owners are paid with interest payments and stock pay
dividends to the owner but only if the organisation declares a dividend. (Averkamp, 2014)
Another difference is that stocks have the central places and exchanges where they are
bought and sold. However, bonds are sold mainly over-the-counter (OTC). In addition, the
rish involved in investing in bonds and stock are different as well. Bond market is usually less
risky compared to investing in a stock market. (Morah, 2014)




Question 3

Stock market is important to companies and organisations. When a company or firm wants
to raise funds to venture into new business or projects they have to either take a loan from
bank or issue shares in the stock market. Stock market is the main source for firms to raise
funds and captial for business expansions. In order to issue shares for investors, the firm
needs to be listed to a stocks exchange. If a firm is already listed, they can issue more shares
to the market for more funds. This is the primary functions of stock market, hence, they are
vital in supporting the growth of industry and commerce in a country. (ShareTipsInfo, 2005)
Stock market is important to individual as it is a way to invest and increase their wealth or
businesses. It is also the livelihood of an individual. When investors need to buy or sell
stocks they have to go through brokers. Brokers are middle man between buyers and sellers
and part of their job is to monitor the stock market for their clients. (ShareTipsInfo, 2005)
Another functions of the stock market is that they are a common platform for buyers and
sellers of the stocks listed in the stock market. It is consider as a secondary market where
retails inestors and institutional investors buy and sell stocks. These stock market traders are
the people who raise the fund for businesses by investing in the stocks. (ShareTipsInfo,
2005) In addition, a companys shares that are listed on the stock market are an indication of
their overall strength and health. When their share price is high, they are shown as a stable
company and therefor attracting more investors to invest in their business. (Lee, 2014)
Stock market plays a crucial role in the econnomy as well. It is a pivotal role in the countrys
growth and commerce. (ShareTipsInfo, 2005) It will have an impact in the peoples wealth
and when people are losing money, they will not be spending as much and as freely as
before. They will be more hesitant and exercise more control over their money. This in turn
causes the countrys economy to fall. (Pettinger, 2013)

References

Schroders plc. (2014, Sep 17). Bonds. Retrieved Sep 17, 2014, from Investment Explained:
http://www.schroders.com/dcpensions/investments-explained/asset-
classes/bonds?style=accordion&collapse

Investopedia US, A Division of IAC. (2014, Sep 17). Bond Basics: What Are Bonds? Retrieved
Sep 17, 2014, from Personal Finance:
http://www.investopedia.com/university/bonds/bonds1.asp

Investopedia US, A Division of IAC. . (2014, Sep 17). Stocks Basics: What Are Stocks?
Retrieved Sep 17, 2014, from Investing:
http://www.investopedia.com/university/stocks/stocks1.asp

Averkamp, H. (2014, Sep 17). What is the difference between stocks and bonds? Retrieved
Sep 17, 2014, from Q&A: http://www.accountingcoach.com/blog/stocks-bonds

Morah, C. (2014, Sep 17). What is the difference between the bond market and the stock
market? Retrieved Sep 17, 2014, from Active Trading:
http://www.investopedia.com/ask/answers/09/difference-between-bond-stock-market.asp

ShareTipsInfo. (2005, Jan 01). Importance of stock market and How stock market is
important for countries economy. Retrieved Sep 17, 2014, from Economy-Stock-Market:
http://www.sharetipsinfo.com/economy-stock-market.html

Lee, M. (2014, Sep 17). Why are corporations so concerned about their stock price? .
Retrieved Sep 17, 2014, from Active Trading:
http://www.investopedia.com/ask/answers/06/firmcaresaboutstockprice.asp

Pettinger, T. (2013, Sep 2). How does the stock market affect the economy? Retrieved Sep
17, 2014, from Economics Help Blog: http://www.economicshelp.org/blog/221/stock-
market/how-does-the-stock-market-effect-the-economy-2/

Calculator.net. (2014, Jan 01). Loan Amortization. Retrieved Sep 16, 2014, from Amortization
Calculator: http://www.calculator.net/amortization-
calculator.html?cloanamount=1280000&cloanterm=20&cinterestrate=4.88&printit=0&x=57
&y=16