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Case Study: Bret Loan Monthly Repayment

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Bret borrows $500,000 from bank to buy a new house. The loan is repayable in monthly installments over 20 years. The nominal interest rate is 10% per annum. What is the monthly repayment? After 5 years have passed, the bank increases the interest rate to 12% per annum and Bret is given the option of either increasing the monthly repayment or extending the terms of the loan. What would be the new monthly repayment if Bret chooses to keep the original loan term unchanged? What would be the new loan term if Bret wishes to keep the original monthly repayment unchanged?
Solution
The monthly repayment is calculated using the future value interest factor method. The interest paid and the outstanding balance at the end of the given period is computed to arrive at the revised monthly payment. Detailed calculations for all the questions are provided along with notations.
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