Interest rate quiz four questions due in 3hours

Problem 1 [25 points]:

You borrow a GPM of $120,000 with annual payments and 30-year term.  The interest rate is 10% and the payment factors from year 1 to year 30 are: 10%, 20%, 30%, 40%, 50%, 60%, 70%, 80%, 90%, 100%, …, 100%.  

Questions:

1. What are the annual payments for years 1 to 30? [10 pints]

2. What is remaining balance at the end of each year? [8 points]

3. What are the interest payment and principal payment for years 1 to 30? [7 points]

Problem 2 [25 points]:

You borrow a GPM of $120,000 with annual payments and 30-year term.  The interest rate is 10%. The payment rises by 2% each year.  

Questions:

1. What are the annual payments for years 1 to 30? [10 points]

2. What is remaining balance at the end of each year? [8 points]

3. What are the interest payment and principal payment for years 1 to 30? [7 points]

Problem 3 [25 points]:

Suppose you borrow $250,000 PLAM (Price Level Adjusted Mortgage) for 30 years, monthly payments with $6,000 origination cost.  The mortgage rate is 6% with annual outstanding balance adjustments based on the following inflation information:

Questions:

1. What is the APR for this loan? [10 points]

2. What is the effective cost if holding the loan for only 5 years? [8 points]

3. What is the effective cost of this loan if holding only for 1 year? [7 points]

Problem 4 [25 points]:

You decide to buy a house of $250,000 with loan amount of $200,000 and you plan to sell the house in year 10. The lender offers the following three SAM choices with $5,000 origination cost for each choice:

· $200,000; 30 years; monthly payment; 0% interest rate; 50% of appreciated value of the property in year 10. In addition, if the property is sold for a loss in year 10, the lender pays nothing.

· $200,000; 30 years; monthly payment; 3% interest rate; 50% of appreciated value of the property in year 10

· $200,000; 30 years; monthly payment; 5% interest rate; 25% of appreciated value of the property in year 10

The housing market conditions:

1. Home price will appreciate 30% in total for the next 10 years;

2. Home price will stay the same for the next 10 years

3. Home price will decline 30% in total for the next 10 years.