Department of Mathematics, Statistics and Insurance

The Hang Seng University of Hong Kong

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 Loan
◦ the lending of money from one entity (the lender)
(could be a person, a company, a government, etc.) to
another entity (the borrower)

 Terms of a loan
◦ the details of the loan agreed between the two
entities, e.g. principal amount, interest rate,
repayment, loan period, etc.

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 The borrower shall repay the lender the principal (P0) and
the interest to pay off the debt.

 The interest rate, the loan period and the frequency of

repayment will affect the amount of the repayment.

 A portion of each repayment is paid for the interest accrued,

and the remaining portion will be the principal deducted
(repaid).

 In general, there is a recursive relationship:

Pt = Pt-1 × (1 + r) – A for t = 1, 2, 3, …, n
where A is the repayment amount.

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 Many different types of loan available

 Two main categories: Secured Loan and Unsecured Loan

 Secured Loan
◦ Collateral is required
◦ e.g. car loan, mortgage, etc.

 Unsecured Loan
◦ Collateral is not required
◦ e.g. personal loan, student loan, etc.

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Today, we are going to discuss:

 Personal Loan
(Regular Repayment vs. Irregular Repayment)

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 Let’s look for some personal loans offered by some
banks in Hong Kong.

 HSBC
https://www.hsbc.com.hk/personal/loans.html

 Citibank
https://www.citibank.com.hk/english/loans/loans.htm?lid=HKENCBGPLMITLOverview

 BOC(HK)
http://www.bochk.com/en/loan/personal.html

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 Monthly Flat Rate
◦ The interest rate of the loan based on simple interest
(I = P0 × r × n)

 Annualized Percentage Rate (APR)

◦ A reference rate which included the basic interest rate and
other fees and charges, expressed as an annualized rate

◦ To annualize: (1 + r)m = 1 + APR

where r is the interest rate per period,
m is the number of period in one year
e.g. If r is monthly interest rate: APR = (1 + r)12 – 1
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 Ellen would like to borrow $10,000 for her trip to Taiwan.
She found that HSBC was offering a monthly flat rate of
0.17% for a 12-month loan with monthly repayment.
(a) Find the monthly repayment.
(b) Find the APR and the repayment schedule using Excel.

(a) Based on the monthly flat rate (simple interest):

Total amount of interest = $10,000 × 0.17% × 12
Priuipal Monthly Loan
= $204 Period
flat rate

Total amount to repay = $10,000 + $204 = $10,204

Priniipal Laterest

Monthly repayment amount = $10,204 ÷ 12 = $850.33

Loan
Repay
Period
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 Remarks:
A personal installment loan repayment calculator is also
available on the HSBC website:
https://www.hsbc.com.hk/personal/loans/personal-instalment-loan/calculator.html

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(b)
 The online calculator showed that the APR was 3.82%,
but it did not have the repayment schedule (or,
sometimes called the amortization schedule).

 So let’s confirm the APR and prepare the repayment

schedule with Excel.

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 To find the APR,
we need to use the
Solver (which is
similar to finding
an interest rate).

 (1) Set up the

spreadsheet with
the correct
formulas.

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 (2) Input parameters in Solver
Set Target Cell: $B$21 (←We want the ending balance to
be $0 because we need to clear the debt after 12 months)
Equal To Value of 0
By Changing Cells: $B$5 (← We want to calculate
interest rate per month, then to calculate the APR)

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 (3) Click Solve and you will have the answer.

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 Again, there are some other ways to write the formulas
in the spreadsheet.

 Here is one
of the
↓
alternatives: ⼆

( + )

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 In fact, HSBC has a table to summarize the monthly repayment and APR
for different loan amount and loan period at different monthly flat rate.

https://retailbank.hsbc.com.hk/promo/personal-instalment-loan/en/home#rates

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 Some other banks, for example, Bank of China (Hong
Kong), also have online repayment calculators for their
personal loans.
◦ https://www.bochk.com/en/home/calculators/personalloan.html

 Bank of China (Hong Kong) has an online converter

between Flat Rate and APR as well.
◦ https://www.bochk.com/en/home/calculators/flatratevsapr.html

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 In Example 1, we pay off the debt with a regular
monthly repayment.

 Some banks might have special offers from time to

time, e.g. payment holiday, cash rewards, etc.

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 An example from OCBC Wing Hang Credit:

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 Janice is considering a 3-year loan of $80,000 from a
bank. Interest is compounded monthly and the annual
interest rate is 6%. The bank allows her to choose one
of the following repayment schedules:
(i) Monthly repayment
(ii) Monthly repayment with a special offer of payment
holiday in June of each year
(iii) Quarterly repayment (i.e. pays at the end of March,
June, September and December of each year)

 (a) Find the amount of each repayment for the

repayment schedules (i), (ii) and (iii).
 (b) Compare the total interest expense.

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 (1) Set up the spreadsheet with the correct formulas and
find the answer by Solver.

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 (2) Input the parameters in Solver

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 (3) Click Solve and you will have the answer.

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 Note: interest will still be accrued in June of every year even
though she can skip her repayment.

 The set up of the spreadsheet is similar to Example 2(a), but

we need to set a formula to tell Excel to pay $0 in June of
each year.

 MOD Function in Excel

◦ The MOD function returns the remainder after a number is divided by
a divisor. + 0
4 ÷ 2 2 2
×
=

◦ Syntax: =MOD(number,divisor) 5÷ 2 = 2 ×
2 +
1

8 ÷ 3 = 3 × 2 + 2

e.g. =MOD(4,2) will return 0 (4 ÷ 2 → Remainder = 0)

=MOD(5,2) will return 1 (5 ÷ 2 → Remainder = 1)
=MOD(8,3) will return 2 (8 ÷ 3 → Remainder = 2)

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 Janice either pays the monthly repayment amount OR
zero in each month. Therefore, we can use IF function
to select one possible “outcome”.

 The combination of IF and MOD function can tell

Excel when she needs to make a repayment (in January
to May and July to December of each year); and when
she doesn’t need to pay anything (in June).

=IF(MOD(Month,12)=6,0,MonthlyRepaymentAmount)

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 (1) Set up the spreadsheet with the correct formulas and
find the answer by Solver.

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 (2) Input the parameters in Solver

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 (3) Click Solve and you will have the answer.

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 Total interest expense =
Total amount of repayment – Principal

(i) $2,433.75 × 36 – $80,000 = $7,615.18

(ii) $2,655.57 × 33 – $80,000 = $7,633.89
(iii) $7,337.83 × 12 – $80,000 = $8053.99

 The more frequent you make a repayment, the less

interest you pay.

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 Ringo would like to borrow $350,000.
 Interest is compounded monthly.
 Annual interest rate is 5.25%.
 Loan period is 10 years.
 Monthly repayment with a special offer of payment
holidays in February and May of each year.

 Find the monthly repayment amount.

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 OR Function in Excel
◦ The OR function is to check whether the arguments are true or
false. It returns “TRUE” if one or more than one of the
arguments is/are true; return “FALSE” if all of the arguments
are false.

◦ Syntax: =OR(argument1,argument2,…)

e.g. =OR(3>2,2<4) will return “TRUE”

=OR(5<2,2>1) will return “TRUE”
=OR(1>3,3>4) will return “FALSE”

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 The combination of OR, IF and MOD function can tell
Excel that Ringo needs to make a repayment in
January, March to April, and June to December of each
year; and no repayment in February and May.

=IF(OR(MOD(Month,12)=2,MOD(Month,12)=5),0,MonthlyRepaymentAmount)

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 Jenny is planning to go to Europe and watch the UEFA
Champions League Final for her graduation trip. The
estimated total cost of the trip is $22,000.

 She could repay $1,000 for 24 months only. Suppose

the annual interest rate is 8% and interest is
compounded monthly, how much could she borrow?

 Would the loan provide sufficient fund for her trip?

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 (1) Set up the
spreadsheet with the
correct formulas and
find the answer by
Solver.

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 (2) Input the parameters in Solver

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 (3) Click Solve and
you will have the
answer.

 With $1,000 monthly

repayment for 24
months, she could
borrow $22,110.54.

 Sufficient for her trip!

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 Christine received a cold call from a finance company. The
representative offered her a loan of $21,000. She could pay it off
with a monthly payment of $1,500 for 20 months and there is
absolutely no handling fees or other charges. Christine doubts
that it might be a fraud.
 Assuming interest is compounded monthly, find the effective
interest rate per annum* of this loan for her.

* Effective interest rate per annum is the annualized interest rate

(like how we annualize it for APR) without incorporating the
handling fees and charges.

 Is this loan legal in Hong Kong?

Note: 60% per annum is the maximum effective rate of interest
that a lender could charge on any loan in Hong Kong.

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 (1) Set up the
spreadsheet with
the correct
formulas and find
the answer by
Solver.

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 (2) Input the parameters in Solver

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 (3) Click Solve
and you will have
the answer.

 Effective Interest
Rate = 54.06%

 It’s still legal!

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