Question 4 (a) Assume that five years ago, you renewed your TD Bank mortgage that had 10 years left at 6% fixed rate for five years. The interest rate is compounded semi- annually, and at an effective monthly rate (EMR) of 0.4939%, you have made monthly payments $1659.765 at the end of each month for the past five years. (i) How much in interest and how much of the loan have you paid over the five years? (ii) You are about to renew the mortgage for the remaining 5 years. Fortunately for you, interest rates have dropped to 5% and you decide to refinance the mortgage. What will be your new monthly payment for the remaining five years? (iii) Immediately after you signed the paperwork to refinance the remaining mortgage, mortgage rates dropped further from 5% to 4%. Your bank has offered you the opportunity to renegotiate the mortgage at the lower rate of 4% for a penalty of $3,000. 1. What will be your monthly mortgage amount if you decide to take the bank's offer to renegotiate at 4%? 2. Should you take this opportunity offered by the bank? Assume your opportunity cost (or discount rate) equals the mortgage rate. (Note: Estimate the savings in mortgage payments and discount them using the lower mortgage as the discount rate. (b) Suppose your mother is expecting to receive the following annual income from one of her investments with RIBC: $20,000 in Year 1; $40,000 in Years 2 and 3, $60,000 in Years 4 and 5, and $80,000 in Year 6. The cash flows occur at the end of the year. She has sought your help in analyzing the cash flows. If her required discount rate is 5% annual compounding, what is the value of the cash flows at the end of Year 4?
Question 4 (a) Assume that five years ago, you renewed your TD Bank mortgage that had 10 years left at 6% fixed rate for five years. The interest rate is compounded semi- annually, and at an effective monthly rate (EMR) of 0.4939%, you have made monthly payments $1659.765 at the end of each month for the past five years. (i) How much in interest and how much of the loan have you paid over the five years? (ii) You are about to renew the mortgage for the remaining 5 years. Fortunately for you, interest rates have dropped to 5% and you decide to refinance the mortgage. What will be your new monthly payment for the remaining five years? (iii) Immediately after you signed the paperwork to refinance the remaining mortgage, mortgage rates dropped further from 5% to 4%. Your bank has offered you the opportunity to renegotiate the mortgage at the lower rate of 4% for a penalty of $3,000. 1. What will be your monthly mortgage amount if you decide to take the bank's offer to renegotiate at 4%? 2. Should you take this opportunity offered by the bank? Assume your opportunity cost (or discount rate) equals the mortgage rate. (Note: Estimate the savings in mortgage payments and discount them using the lower mortgage as the discount rate. (b) Suppose your mother is expecting to receive the following annual income from one of her investments with RIBC: $20,000 in Year 1; $40,000 in Years 2 and 3, $60,000 in Years 4 and 5, and $80,000 in Year 6. The cash flows occur at the end of the year. She has sought your help in analyzing the cash flows. If her required discount rate is 5% annual compounding, what is the value of the cash flows at the end of Year 4?
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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Transcribed Image Text:Question 4
(a) Assume that five years ago, you renewed your TD Bank mortgage that had 10
years left at 6% fixed rate for five years. The interest rate is compounded semi-
annually, and at an effective monthly rate (EMR) of 0.4939%, you have made
monthly payments $1659.765 at the end of each month for the past five years.
(i) How much in interest and how much of the loan have you paid over the five
years?
(ii) You are about to renew the mortgage for the remaining 5 years. Fortunately for
you, interest rates have dropped to 5% and you decide to refinance the mortgage.
What will be your new monthly payment for the remaining five years?
(iii) Immediately after you signed the paperwork to refinance the remaining
mortgage, mortgage rates dropped further from 5% to 4%. Your bank has offered
you the opportunity to renegotiate the mortgage at the lower rate of 4% for a
penalty of $3,000.
1. What will be your monthly mortgage amount if you decide to take the bank's
offer to renegotiate at 4%?
2. Should you take this opportunity offered by the bank? Assume your
opportunity cost (or discount rate) equals the mortgage rate. (Note: Estimate
the savings in mortgage payments and discount them using the lower
mortgage as the discount rate.
(b) Suppose your mother is expecting to receive the following annual income from
one of her investments with RIBC: $20,000 in Year 1; $40,000 in Years 2 and 3,
$60,000 in Years 4 and 5, and $80,000 in Year 6. The cash flows occur at the end of
the year. She has sought your help in analyzing the cash flows. If her required
discount rate is 5% annual compounding, what is the value of the cash flows at the
end of Year 4?
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