Loan term   in years   Monthly Payment on $178,000 loan (in $) Total amount paid back over the full loan term (in $) Interest over the full loan term (in $) Difference in monthly payment from option above (in $)   t = 15    years   Pmt = $ 1316.64   F =   I =   No entry here   t = 30    years   Pmt = $   849.80   F =   I = Difference in MONTHLY payment   t = 40    years   Pmt = $   743.93   F =   I = Difference in MONTHLY payment   t = 50    years   Pmt = $   686.56   F =   I = Difference in MONTHLY payment

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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A $178,000 mortgage loan is offered at an APR of 4%. Follow the instructions below the table.

The loan payment formula was used to calculate the monthly payments for the loans and results are reported in the table below. You do NOT have to verify the given payment entries (you already used the formula for calculating payments in the first part

Loan term   in years

 

Monthly Payment on $178,000 loan (in $)

Total amount paid back over the full loan term (in $)

Interest over

the full loan term

(in $)

Difference in monthly

payment from option

above (in $)

 

t = 15

   years

 

Pmt = $ 1316.64

 

F =

 

I =

 

No entry here

 

t = 30

   years

 

Pmt = $   849.80

 

F =

 

I =

Difference in MONTHLY payment

 

t = 40

   years

 

Pmt = $   743.93

 

F =

 

I =

Difference in MONTHLY payment

 

t = 50

   years

 

Pmt = $   686.56

 

F =

 

I =

Difference in MONTHLY payment

For each loan term option, calculate the total amount paid back over the full loan term and display it in the table. (F stands for “future value”, can also be abbreviated by A for “accumulated amount”). Attach notebook paper for (in this part optional) calculations or just put result in table above.

 

For each loan term option, calculate the total interest paid over the full loan term and display it in the table. Attach notebook paper for (in this part optional) calculations or just put result in table above.

 

For each row, calculate the difference between the MONTHLY payment for this loan term and the MONTHLY payment for the time frame that was a decade less listed in the row above. Display the four monthly differences in the table. Attach notebook paper for (in this part optional) calculations or just put result in table above.

 

Discuss whether or not it makes sense to take out a mortgage for more than 30 years versus taking a mortgage out for 30 or 15 years. (Mortgage companies and banks seem to be pushing longer than 30 year options for young home buyers.) Explain the advantages and disadvantages such extremely long mortgages have compared to a shorter time period. Don’t be too brief and base your answer at least in part on the numbers in the filled-in table

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3) Here’s how pay day loans work: A borrower writes a personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing and dates the check in the near future (by exactly as many days as the loan is agreed upon – usually between 10 and 31 days). The company gives the borrower the amount of the check less the fee, and agrees to hold the check until the loan is due, usually the borrower’s next payday. Or, with the borrower’s permission, the company deposits the amount borrowed – less the fee – into the borrower’s checking account electronically. The loan amount is due to be debited the next payday. The fees are substantial compared to the small loan amounts (most payday loans are between $100 and $500. The borrower is charged new fees each time the same loan is extended or “rolled over” in case the borrower needs to extend the timeline. Each time payment in full by the borrower to the company is postponed the same fee is due and the loan is only extended the same number of days that the loan was supposed to last when taken out. 

 

 

 

     with   r = the APR as a decimal   and   t = the time in years

 

Since payday loan initial terms are not lasting a full year, use the quotient 

 

 

 

 

      Jane borrowed $500 and paid $525 in total fees on the loan for a sum of $1025 after rolling over the loan 6 times (after the initial 14 days were up) for 7 fourteen day periods. After these 98 days she finally had saved up enough to pay her loan back. Calculate the APR on this $500 loan using $525 as the interest (since the fee is for the use of the money, interpreting it as the interest makes sense) and 98 days for the number of days of the loan. Solving the simple interest equation for r, calculate the APR rounded to the closest full percent. (Turn the APR into a percent and round to the closest integer.)

 

 

 

 

 

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