reverse annuities, because you get a lump-sum amount as a loan in the beginning, and then you make the periodic payments (usually m more frequently, depending on the agreement) to the lender. You've decided to buy a house that is valued at $1 million. You have $400,000 to use as a down payment on the house, and you take ou for the rest. Your bank has approved your mortgage for the balance amount of $600,000 and is offering you a 25-year mortgage with 12 nominal interest rate (called the APR, or Annual Percentage Rate) compounded semiannually. According to this proposal, what will be yo mortgage payment? $7,740 O $6,192 $8.359
reverse annuities, because you get a lump-sum amount as a loan in the beginning, and then you make the periodic payments (usually m more frequently, depending on the agreement) to the lender. You've decided to buy a house that is valued at $1 million. You have $400,000 to use as a down payment on the house, and you take ou for the rest. Your bank has approved your mortgage for the balance amount of $600,000 and is offering you a 25-year mortgage with 12 nominal interest rate (called the APR, or Annual Percentage Rate) compounded semiannually. According to this proposal, what will be yo mortgage payment? $7,740 O $6,192 $8.359
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:12. Amortized loans
Mortgages and other amortized loans (meaning equal or blended payments) involve regular payments at fixed intervals. These are sometimes called
reverse annuities, because you get a lump-sum amount as a loan in the beginning, and then you make the periodic payments (usually monthly or
more frequently, depending on the agreement) to the lender.
You've decided to buy a house that is valued at $1 million. You have $400,000 to use as a down payment on the house, and you take out a mortgage
for the rest. Your bank has approved your mortgage for the balance amount of $600,000 and is offering you a 25-year mortgage with 12% fixed
nominal interest rate (called the APR, or Annual Percentage Rate) compounded semiannually. According to this proposal, what will be your monthly
mortgage payment?
OOO
$7,740
$6,192
$8,359
$9,598
Your friends suggest that you take a 15-year mortgage, because a 25-year mortgage is too long and you will lose a lot of money on interest. If your
bank approves a 15-year, $600,000 loan at a fixed nominal interest rate of 12% (APR), what will be the difference in the payments of the 15-year
mortgage and 25-year mortgage?
It is likely that you won't like the prospect of paying more money each month, but if you do take out a 15-year mortgage, you will make far fewer
payments and will pay a lot less in interest. How much more interest will you pay if you take out a 25-year mortgage instead of a 15-year
mortgage?
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