Question Tag: Mortgage Loan

a) Onana Events Company (Onana) is purchasing a building from a real estate company. The current cash price of the building is GH¢2,500,000. Onana can obtain a GH¢2,500,000 mortgage loan to finance the payment of the cash price of the building. The loan bears a compound annual interest rate of 18% and calls for equal payments at the end of each quarter for 20 years.

Required:

i) Compute the quarterly payment.
(4 marks)

ii) Compute the total interest that will be paid by Onana to the mortgage company over the life of the loan.
(2 marks)

iii) Suppose the real estate company is offering a credit payment plan to Onana. Per the credit terms, Onana will have to pay GH¢500,000 now and then pay GH¢110,000 at the end of each month for one year. The implicit interest rate is 20% per annum. Compute the aggregate present value of the payments under this option.
(4 marks)

b) Sempe Ghana Plc needs to have EUR650,000 in two months’ time to settle a trade payable. The management team fears that the cedi would depreciate against the euro in the coming months. The team is however divided over whether the currency risk exposure should be hedged using a forward foreign exchange contract or a futures foreign exchange contract. The following quotations have been obtained from Ghana’s foreign exchange market:

Required:

i) Explain to the management of Sempe Ghana Ltd whether the foreign exchange quotations provided above are direct quotations or indirect quotations.
(5 marks)

ii) Suppose the company uses the forward contract to hedge its currency exposure. Compute the outcome of the forward contract hedge.
(5 marks)