You have a choice between the following two identical homes: Home A is priced at $150,000 with 80 percent financing at a 10.5 percent interest rate for 20 years. Home B is priced at $160,000 with an assumable mortgage of $100,000 at 9 percent with 20 years remaining. Monthly payments are $899.73. A second mortgage for $20,000 can be obtained at 13 percent interest for 20 years. At what opportunity rate of return (IRR) would the borrower be indifferent between Home A and Home B (expressed in decimals, rounded to three digits)?
You have a choice between the following two identical homes: Home A is priced at $150,000 with 80 percent financing at a 10.5 percent interest rate for 20 years. Home B is priced at $160,000 with an assumable mortgage of $100,000 at 9 percent with 20 years remaining. Monthly payments are $899.73. A second mortgage for $20,000 can be obtained at 13 percent interest for 20 years. At what opportunity rate of return (IRR) would the borrower be indifferent between Home A and Home B (expressed in decimals, rounded to three digits)?
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:You have a choice between the following two identical homes: Home A is priced at
$150,000 with 80 percent financing at a 10.5 percent interest rate for 20 years.
Home B is priced at $160,000 with an assumable mortgage of $100,000 at 9 percent
with 20 years remaining. Monthly payments are $899.73. A second mortgage for
$20,000 can be obtained at 13 percent interest for 20 years. At what opportunity
rate of return (IRR) would the borrower be indifferent between Home A and Home B
(expressed in decimals, rounded to three digits)?
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