18 FEBRUARY

NEW ZEALAND GAZETTE

455

(5) Example E (illustrating the application of Methods A and B to a reviewable rate loan)

A company borrows $1,000,000 for 5 years. The loan will be repaid on a table mortgage basis over the 5 year period with yearly interest reviews. The initial interest rate is 14.5% pa. A fee of $10,000 is charged when the loan is drawn down. The company is a New Zealand taxpayer and the issuer in relation to the financial arrangement.

For the purposes of this example, the total expenditure incurred has been calculated using both Method A and Method B.

(a) Method A

The Total Finance Charges Excluding Interest payable by the issuer equals:

$ 1,000,000 principal payable

• 10,000  fees paid

• 1,000,000 principal received
  a = 10,000

Ignoring the sign, this is less than:

2% × 5 × 653,736 (average principal outstanding)
= $65,373

Therefore Method A may be applied.

The expenditure deemed to be incurred by the issuer is equal to x + y

(i) Calculate the value of x.

The following table sets out the cashflows in relation to the arrangement (based on an initial interest rate of 14.5% pa) and the allocation of the Total Finance Charges Excluding Interest to each income year on a straight line basis, as allowed for in Method A.

Notes: (1) Calculated at 14.5 % pa
(2) Figures rounded to nearest whole dollar
(3) b = 1, since all Periods are the same length a = 10,000, and d = 3,268,678 throughout the term of the arrangement.

(ii) In this case, “y” is the actual Interest paid in a Period. Values for this example are shown in the table below.

(iii) The expenditure deemed to be incurred in each Period is shown in the table below. The example assumes that the annual payment is adjusted to reflect the move in Interest rates. Thus the principal outstanding in any period will be as calculated in the table above.

Notes: (1) Figures rounded to whole numbers.
(2) (i) $1,000,000 (principal outstanding in the first Period) x 14.5% = $145,000
(ii) $850,208 (principal outstanding in the second period) x 13.5% = $114,778
(3) The allocation of the Total Finance Charges

Excluding Interest does not change as the Interest rate changes.

(b) Method B

This example assumes that the borrower chose to account for all its variable rate financial arrangements using Method B of this Determination. The expenditure deemed to be incurred is calculated using the formula x + y.

(i) Calculate e.

The yield to maturity is calculated as 14.923% pa using Determination G3: Yield to Maturity Method and the expected cashflows which are as follows:

(990,000) principal lent net of fees paid
294,792 annual payments
294,792 "
294,792 "
294,792 "
294,792 "

The table below shows the values of e for each Period.

(ii) Calculate f at an Interest rate of 12.45%, the rate for the first Period. The values for f are shown on the table below.

The following table shows the calculation of the expenditure deemed to be incurred by the borrower.

Notes: (1) Based on the yield to maturity rate of 14.923% pa, calculated using Determination G3 and an Interest rate of 14.5% throughout.
(2) At 14.5% pa; this is the same as in the first table in paragraph (a) above.
(3) Actual Interest payable (y) is calculated on principal outstanding in each Period and is the same as the second table in paragraph (a) above.
(4) Figures rounded to whole numbers.

(6) Example F (illustrating Method B on an income year basis)

Method B may be applied in respect of Periods or income years. In example D and E, Determination G3 was used to calculate the yield to maturity rate, which was then used to calculate e (Total Finance Charges), for each Period. In the present example, Determination G10B: Present Value Calculation Methods is used in conjunction with Determination G11A: Present Value Based Yield to Maturity Method to calculate the yield to maturity rate and e for each income year. Example F is similar to example D.

On 1 March 1992 a New Zealand investor purchases, for $9,000 a 3 year note with a face value of $10,000 maturing 1 March 1995. Interest at Libor plus 1% pa, is payable half yearly in arrears. Fees of 2% of the face value are payable by the borrower to the investor on issue. The investor balances on 31 March and elects to use a 365 day basis.

The Interest rate is 10% pa in the first Period after issue.

Assuming that this Interest rate holds throughout the term of the notes, the yield to maturity is 15.12% pa, calculated at half yearly rests. This allows for the 2% fees, and uses the net purchase price of 9,000 - 200 = 8,800.

Income deemed to be derived during an income year is calculated using the formula x + y.