A lender is considering what terms to allow on a loan. Current market terms are 9 percent interest for 25 years for a fully amortizing loan. The borrower, Rich, has requested a loan of $103,000. The lender believes that extra credit analysis and careful loan control will have to be exercised because Rich has never borrowed such a large sum before. In addition, the lender expects that market rates will move upward very soon, perhaps even before the loan is closed. To be on the safe side, the lender decides to extend to Rich a CPM loan commitment for $97,850 at 9 percent interest for 25 years; however, the lender wants to charge a loan origination fee to make the mortgage loan yield 10 percent. Required: a. What origination fee should the lender charge? b. What fee should be charged if it is expected that the loan will be repaid after 10 years?

A lender is considering what terms to allow on a loan. Current market terms are 9 percent interest for 25 years for a fully amortizing loan. The borrower, Rich, has requested a loan of $103,000. The lender believes that extra credit analysis and careful loan control will have to be exercised because Rich has never borrowed such a large sum before. In addition, the lender expects that market rates will move upward very soon, perhaps even before the loan is closed. To be on the safe side, the lender decides to extend to Rich a CPM loan commitment for $97,850 at 9 percent interest for 25 years; however, the lender wants to charge a loan origination fee to make the mortgage loan yield 10 percent. Required: a. What origination fee should the lender charge? b. What fee should be charged if it is expected that the loan will be repaid after 10 years?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Mr. Saso is planning to take a loan of $5 million to be repaid over 10 years. He is contemplating different strategies and decides to borrow $500,000 at 3% interest rate this year and then renew the loan annually. What has Mr. Saso’s strategy achieved? Question 12 options: The strategy eliminates both credit risk and repricing risk The strategy eliminates credit risk but not repricing risk The strategy leaves Mr. Saso exposed to both credit risk and repricing risk The strategy eliminates repricing risk but not credit risk
You have just sold your house for $900,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $740,000. The mortgage is currently exactly 18.5 years old, and you have just made a payment. If the interest rate on the mortgage is 7.75% (APR), how much cash will you have from the sale once you pay off the mortgage? (Note: Be careful not to round any intermediate steps less than six decimal places.) Cash that remains after payoff of mortgage is $ (Round to the nearest cent.)
Considering the following information, what is the net benefit if the borrower refinances the loan (benefit analysis, NOT NPV analysis)? Initial Loan balance: 723,000 Initial loan term: 30 years Current Loan interest: 5.75% Remaining term on current loan: 20 years New loan term: 15 years New loan interest: 2.50% Cost of refinancing: 3% of the loan amount Expected holding period: 8 years In Excel
You have just sold your house for $900,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $800,000. The mortgage is currently exactly 18 years old, and you have just made a payment. If the interest rate on the mortgage is 6.25% (APR), how much cash will you have from the sale once you pay off the mortgage? (Note: Be careful not to round any intermediate steps less than six decimal places.) Cash that remains after payoff of mortgage is $ (Round to the nearest dollar.)
You borrow $1,000 from a bank at 6% annual interest and promise to pay it back after a year. As you sign the loan documents, both you and the bank expect inflation to be 3% in the coming year. During the course of the year, however, the average price level rises by only 1%. What best describes this situation? Select one: a. Both you and the bank are better off because the inflation rate is less than the nominal interest rate but greater than zero. O b. The bank has gained at your expense because the real interest rate on the loan is higher than expected. c. Neither you nor the bank has gained anything extra because the inflation rate is less than the nominal interest rate. O d. You have gained at the bank's expense because you can pay the bank back in inflated dollars.
Which of the following is TRUE? O An American call option on a stock should never be exercised early O An American call option on a stock should be exercised early when dividends are expected O It can sometimes be optimal to exercise early an American call option on a stock even when no dividends are expected and there is no liquidity or portfolio rebalancing need. O An American call option on a stock should never be exercised early when no dividends are expected << Previous Next ▸
show all excel formulas/ work answering the following: Pure Discount Loans Treasury bills are excellent examples of pure discount loans. Principal amount is repaid at some future date. No periodic interest payments. If a T-bill promises to repay $10,000 in 12 months and the market interest rate is 7 percent, how much will the bill sell for in the market? Amortized Loan with Fixed Payment: Example Each payment covers the interest expense plus reduces principal. Consider a 4-year loan with annual payments. The interest rate is 8% and the principal amount is $5000. What is the annual payment? Create a schedule showing how the loan is repaid
You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30-year mortgage loan for 80 percent of the $2,600,000 purchase price. The monthly payment on this loan will be $16,700. a. What is the APR on this loan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the EAR on this loan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Annual percentage rate b. Effective annual rate % %
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The time value of money is used for many important financial decisions that could affect long-term goals. The interest rate you pay on a loan can affect the amount you pay each period. An advertised monthly lending rate of 9% is about 11% per year. This difference between an advertised rate and the annualized rate is based on finer TVM details that may be overlooked by borrowers. What practical TVM application would you expect to encounter in your future? Explain.
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Suppose that five years ago you took a fixed-rate mortgage on your home for $150,000 at 7.75% for 30 years, monthly payments. Today the mortgage rate on 25-year fixed-rate mortgages is 7.20% and you are considering refinancing. The existing loan does not have a prepayment penalty but lenders are charging 4.00% financing costs on new loans. Your opportunity investment rate is 8.5%. a. If you plan to hold the mortgage financing for the next 25 years (whether you refinance or not), what is the NPV of refinancing? Assume that you would refinance the payoff of the existing loan and the new loan amortization would be for 25 years. b. What is the NPV of refinancing if you refinance the payoff of the existing loan for 25 years but you plan to hold the financing for only eight more years?

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