19 May 1- tom is about to make an investment, assuming he had to choose
1- tom is about to make an investment, assuming he had to choose between Ordinary Annuity and Annuity Due. Which of these two types of payment would you recommend for tom assuming all else being equal, and why?2- Give examples of when a person might need to calculate the followinga- Present valueb- Loan balance3- What is the accrual rate and payment rate on a mortgage loan? What happens when the two are different?4- Discuss two elements effecting the house prices to increase?1- An interest only ARM is made for $180,000 for 30 years. The start rate is 7 percent, with a floor on interest rate of 6%, and the borrower will (1) make monthly interest only payments for 3 years. Payments thereafter must be sufficient to fully amortize the loan at maturity. (2/. )a. What will the payments be for the first 3 years?b. Assume that at the end of year 3, the reset rate is 5 percent. What will payments be?2- A partially amortizing mortgage is made for $60,000 for a term of 10 years. The borrower and lender agree that a balance of $20,000 will remain and be repaid as a lump sum at that time. If the interest rate is 7 percent, what must monthly payments be over the 10-year period? (2/. )3- A price level adjusted mortgage (PLAM) is made with the following terms: Amount $200,000, Initial interest rate 4 percent, Term 30 years, Payments to be reset at the beginning of each year. Assuming inflation is expected to increase at the rate of 6 percent at the end of year five. (4/. )a. Compute the payments at the beginning of year 3(BOY3).b. What is the loan balance at the end of the fifth year?c. What is the yield to the lender on such a mortgage?4- An investor is considering the acquisition of a “distressed property’’ which is on Northlake Bank’s REO list. The property is available for $200,000 and the investor estimates that the property will require the following total expenditures during the next year:Inspection $ 500Title search 1,000Renovation 13,000Landscaping 800Insurance 1,800Property taxes 6,000Selling expenses 8,000a- The investor is wondering what such a property must sell for after one year in order to earn a 20 percent return? (2/. )b- Assume you are planning to own a residential property, which approach would you choose to make the best price estimate, and why? (2/. )
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