An investor took out a loan of $15,000 for three years at a variable interest rate where the interest rate resets at the beginning of each year to the 1-year spot rate. The investor will make an interest payment to the lender at the end of each year and repays the loan amount at the end of 3 years. The 1-year spot rate is 3%, the 2-year spot rate is 4%, and the 3-year spot rate is 6%. The investor decided to enter into an interest rate swap to fix the interest rate for 3 years where the terms of the swap match the terms of the loan. Determine the level swap rate R.

An investor took out a loan of $15,000 for three years at a variable interest rate where the interest rate resets at the beginning of each year to the 1-year spot rate. The investor will make an interest payment to the lender at the end of each year and repays the loan amount at the end of 3 years. The 1-year spot rate is 3%, the 2-year spot rate is 4%, and the 3-year spot rate is 6%. The investor decided to enter into an interest rate swap to fix the interest rate for 3 years where the terms of the swap match the terms of the loan. Determine the level swap rate R.

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

See similar textbooks

Similar questions

The interest rate for the first five years of a $95,000 mortgage is 7.2% compounded semiannually. Monthly payments are based on a 25-year amortization. Suppose a $3,000 prepayment is made at the end of the third year.a. How much will the amortization period be shortened? b. What will be the principal balance at the end of the five-year term?
Anna borrows 188000 from a bank for a term of 21 years. The loan is to be repaid by level annual repayments, paid in arrears, and the interest rate is 5% per annum effective. Calculate the capital outstanding immediately after the 6th payment. Give your answer to two decimal places.
A borrower has the option of accepting a fixed rate loan for five years at 10% or a floating rate loan of LIBOR plus 3%. Assume the current LIBOR rate is 6%. If the floating rate loan was chosen, did the borrower make the right decision if the LIBOR rates at the beginning of the next four years are 6.5%, 7.0%, 7.5%, and 7.75%? Note that the LIBOR rate at the beginning of the year is used to determine the payment at the end of the year.
A mortgage for $200,000 with interest rate of 7.20%, fixed monthly payments, and term of 30 years was originated 10 years ago. If the loan's current balance is refinanced for the rest of the original term of at the rate of 6.30% with monthly payments, what is the implied annual savings rate given that the existing loan has a refinancing fee of 4% of the remaining balance at the time of refinancing and that loan is expected to be outstanding for 9 years? Selected Answer: Below 6% O A. Correct Answer: Е. Between 12% and 14%
A borrower is interested in comparing the monthly payments on four otherwise equivalent 30 year FRMs. All of the loans are for $300,000 and have a 5.0% interest rate. Rank the loans in size order of their monthly payments from smallest to largest: 1) Fully amortizing ($0 balance remaining at the end of the loan term) 2) Interest-Only ($300,000 balance remaining at the end of the loan term) 3) Partial Amortization ($200,000 balance remaining at the end of the loan term) 4) Negative Amortization ($400,000 balance remaining at the end of the loan term) a) 1, 2, 3, 4 b) 4, 3, 2, 1 c) 4, 2, 3, 1 d) 1, 3, 2, 4
The monthly payments for the first three-year term of a $250,000 mortgage loan were based on a 25-year amortization period. The interest rate on the mortgage was 3.4% compounded semiannually. 1. What was the size of the monthly payment? 2. What was the principal balance at the end of the three-year term? 3. What would be the size of the monthly payment upon renewal at 3.8 % compounded semiannually now amortized over 22 years?
Establish loan amortization schedules for 3-year loan of $20,000 (initial loan) with equal payments at the end of each year. The interest rate is 5 percent per year.PLEASE SHOW HOW YOU COMPUTE EACH OF THE ITEMS.
Prepare an amortization schedule for a five-year loan of $20,000 in its entirety. The interest rate is 8.2 percent per year, and the loan calls for equal annual payments.
You purchase a home and take on a $600k mortgage. The amortization period of the loan is 20 years, and the first term is a fixed rate for 4 years during which time you are required to make semi-monthly (each half-month) payments at 8% APR compounded quarterly. On the first-year anniversary you make an additional $50,000 payment. Find the balance owing immediately after the second anniversary of your payments. The balance is within $200 of which of the following? 518,025 518,425 518,825 519,225 None of the above
A borrower has secured a 30 year, $154,00O loan at 7% with monthly payments. Fifteen years later, the borrower has the opportunity to refinance with a fifteen year mortgage at 6%. However, the new loan requiers the borrower to pay 2 points at chopsing. What is the return on investment if the borrower expects to remain in the home for the next fifteen years? Please input your answer as an annual interest rate (i.e. 8.32% would be input as 8.32).

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS