Question
1. An interestonly mortgage is made for $80,000 at 10 percent interest for 10 years. The lender and borrower agree that monthly payments will be
1. An interestonly mortgage is made for $80,000 at 10 percent interest for 10 years. The lender and borrower agree that monthly payments will be constant and will require no loan amortization.
a. What is the Present Value (PV) of all remaining payments in year 5? Discuss your answer.
b. What is the Present Value (PV) of all remaining payments in year 5 if the interest rate falls to 5% in year 5?
c. If the borrower refinances at a 5% interest rate in year 5, how much does the lender lose in value?
d. What is the Present Value (PV) of all remaining payments in year 5 if the interest rate rises to 15% in year 5?
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