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.