Problems

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Skill-Building Problems.

1. To purchase a house, you take out a 30 year mortgage. The present value (loan amount) of the

mortgage is $217,832. The mortgage charges an interest rate / year of 9.27%. What is the annual

payment required by this mortgage? How much of each year's payment goes to paying interest

and how much reducing the principal balance?

2. In purchasing a house, you need to obtain a mortgage with a present value (loan amount) of

$175,000. You have a choice of: (A) a 30 year mortgage at an interest rate / year of 9.74% or (B)

a 15 year mortgage at an interest rate / year of 9.46%. What is the annual payment required by the

two alternative mortgages? How much of each year's payment goes to paying interest and how

much reducing the principal balance by the two alternative mortgages? Which mortgage would

you prefer?

3. Consider a 30 year mortgage for $442,264 as in the previous section. What would happen if the

interest rate / year dropped from 9.21% to 7.95%. How much of each year's payment goes to

paying interest vs. how much goes to reducing the principal under the two interest rates?

Live In-class Problems.

4. Given the partial Basics spreadsheet LoanbasZ.xls, do steps 4 Payment, 5 Interest Component

in year t, 6 Principal Component in year t, 7 Beg. Principal Balance in year t, and 8 Copy

the Formulas.

5. Given the partial Sensitivity Analysis spreadsheet LoansenZ.xls, complete steps 2 Interest

Component Data Table and 3 Principal Component Data Table.

Skill-Building Problems.

1. To purchase a house, you take out a 30 year mortgage. The present value (loan amount) of the

mortgage is $217,832. The mortgage charges an interest rate / year of 9.27%. What is the annual

payment required by this mortgage? How much of each year's payment goes to paying interest

and how much reducing the principal balance?

2. In purchasing a house, you need to obtain a mortgage with a present value (loan amount) of

$175,000. You have a choice of: (A) a 30 year mortgage at an interest rate / year of 9.74% or (B)

a 15 year mortgage at an interest rate / year of 9.46%. What is the annual payment required by the

two alternative mortgages? How much of each year's payment goes to paying interest and how

much reducing the principal balance by the two alternative mortgages? Which mortgage would

you prefer?

3. Consider a 30 year mortgage for $442,264 as in the previous section. What would happen if the

interest rate / year dropped from 9.21% to 7.95%. How much of each year's payment goes to

paying interest vs. how much goes to reducing the principal under the two interest rates?

Live In-class Problems.

4. Given the partial Basics spreadsheet LoanbasZ.xls, do steps 4 Payment, 5 Interest Component

in year t, 6 Principal Component in year t, 7 Beg. Principal Balance in year t, and 8 Copy

the Formulas.

5. Given the partial Sensitivity Analysis spreadsheet LoansenZ.xls, complete steps 2 Interest

Component Data Table and 3 Principal Component Data Table.