80. Amortizing Loans and Inflation. Suppose you take out a $100,000, 20-year mortgage loan to buy a condo. The interest rate on the loan is 6%, and to keep things simple, we will assume you make payments on the loan annually at the end of each year. (LO3)

a. What is your annual payment on the loan?

b. Construct a mortgage amortization table in Excel similar to Table 5-5 in which you com- pute the interest payment each year, the amortization of the loan, and the loan balance each year. (Allow the interest rate to be an input that the user of the spreadsheet can enter and change.)

c. What fraction of your initial loan payment is interest? What fraction is amortization? What about the last loan payment? What fraction of the loan has been paid off after 10 years (half- way through the life of the loan)?

d. If the inflation rate is 2%, what is the real value of the first (year-end) payment? The last?

e. Now assume the inflation rate is 8% and the real interest rate on the loan is unchanged. What must be the new nominal interest rate? Recompute the amortization table. What is the real value of the first (year-end) payment in this high-inflation scenario? The real value of the last payment?

f. Comparing your answers to

(d) and (e), can you see why high inflation rates might hurt the real estate market?