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05 Sep 2014, 14:59
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How come repayment amount ( SUM OF ALL PAYMENTS) is 1n?? Explanation very confusing. Can anyone help?
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08 Sep 2014, 07:37
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saikrishna123
If you check the actual meaning of loan proceeds, then u can understand the answer
Loan proceeds: The net amount of money that a lender disburses for a loan.
Example: A borrower agreed to a $100,000 mortgage loan. The lender charged 1% for origination and a 1% discount, providing $98,000 of loan proceeds.
Here 80% of collateral or loan amount = n or 1n
discount = .15n (15% of loan amount)
so actual amount given for loan or Loan proceeds = .85n (1n-.15n)
Actual repayement amount is = 1n or n only
There is no rate of interest here.
Taking example:
The deal here is that company gives loan of say $1000 but actually company will be giving you $850 and in return u will be repaying company $1000 ($150 is ur interest amount)
PS: Is this problem from IR prep tool? If yes then can you provide the feedback of it.
13 Oct 2014, 02:05
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Quote:
This analysis is NOT correct
ANY loan is given against collateral
so if the loan amount is N .then the interest that u owe to the lending party is 0.15 N
now "LOAN PROCEEDS" is the amount that u owe to the lending party BUT it is NOT the TOTAL amount that you owe to the lending party. the TOTAL AMT is the the summation of "LOAN PROCEEDS" + "INTEREST"
hence "REPAYMENT AMT" ="LOAN PROCEEDS" + "INTEREST"
SO "REPAYMENT AMT" = N - 0.15N +0.15N = N
IT would be wrong to say that there is "NO RATE OF INTEREST" here . the fact is that it getting cancelled because of some weird condition of "LOAN PROCEEDS", a situation which will never be in real life !!
PS : there can be NO LOAN without an interest in real life situation
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