1. A loan officer states that "Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage." Calculate the difference in payments on a 30-year mortgage at 9% interest versus a 15-year mortgage with 8.5% interest. Both mortgages are for $100,000 and have monthly payments. What is the difference in total dollars that will be paid to the lender under each loan?

2. You own a bond that pays 7.5% annual interest, with $1,000 par value. It matures in 15 years. Your required rate of return is 7 percent.

a. Calculate the value of the bond.

b. How does the value change if your required rate of return

(i) increases to 10 percent or

(ii) decreases to 4 percent?

c. Explain the implications of your answers in part (b) as they relate to interest rate risk, premium bonds, and discount bonds.

d. Assume that the bond matures in 5 years instead of 15 years. Re-compute your answers in parts (a and b).

e. Explain the implications of your answers in part (d) as they relate to interest rate risk, premium bonds, and discount bonds.