The following assumptions are made for each Investigation: • The original mortgage is $300,000 amortized over 25 years at 3.99% compounded semi- annually • Unless otherwise indicated, assume monthly payments are made. • Unless otherwise indicated, assume the interest rate remains constant during the amortization period. Your answers can be entered directly on this assignment, but please hand in all rough work as well.

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
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The following assumptions are made for each Investigation:
The original mortgage is $300,000 amortized over 25 years at 3.99% compounded semi-
annually
Unless otherwise indicated, assume monthly payments are made.
Unless otherwise indicated, assume the interest rate remains constant during the
amortization period.
Your answers can be entered directly on this assignment, but please hand in all rough work as
well.
Investigation 1: Shortening the Payment Period
Most lending institutions allow mortgage payments to be made monthly, bi-monthly (twice a
month) or weekly. Most even allow "accelerated" weekly mortgage payments. With this
option, the weekly payment is calculated as a monthly payment divided by 4.
1. (a) Complete this table for the mortgage defined above. The equivalent interest rate of
interest for each compounding period has been calculated for you (as discussed in
section 6.4 in your text). The Interest saved is the difference between the Total interest
paid for monthly compounding and the Total erest paid for the compounding period
being calculated.
Payment
Frequency Interest
rate
Monthly 3.957%
Bi-monthly 3.954%
Equivalent Number Total
payments number
per year
payments
Weekly 3.952%
Accelerated 3.952%
weekly
1
1137
Payment Total
amount
paid
Total
interest
paid
Interest
saved
0
(b) Explain the result in terms of interest paid when payments are made more often.
Transcribed Image Text:The following assumptions are made for each Investigation: The original mortgage is $300,000 amortized over 25 years at 3.99% compounded semi- annually Unless otherwise indicated, assume monthly payments are made. Unless otherwise indicated, assume the interest rate remains constant during the amortization period. Your answers can be entered directly on this assignment, but please hand in all rough work as well. Investigation 1: Shortening the Payment Period Most lending institutions allow mortgage payments to be made monthly, bi-monthly (twice a month) or weekly. Most even allow "accelerated" weekly mortgage payments. With this option, the weekly payment is calculated as a monthly payment divided by 4. 1. (a) Complete this table for the mortgage defined above. The equivalent interest rate of interest for each compounding period has been calculated for you (as discussed in section 6.4 in your text). The Interest saved is the difference between the Total interest paid for monthly compounding and the Total erest paid for the compounding period being calculated. Payment Frequency Interest rate Monthly 3.957% Bi-monthly 3.954% Equivalent Number Total payments number per year payments Weekly 3.952% Accelerated 3.952% weekly 1 1137 Payment Total amount paid Total interest paid Interest saved 0 (b) Explain the result in terms of interest paid when payments are made more often.
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