1. Explain how each of the following facts or provisions is likely to affect the interest rate on a real estate loan, and explain briefly:

a. a longer time to maturity

b. regular scheduled payments of principal

c. an option for the borrower to repay the principal prior to maturity without penalty

d. an adjustable interest rate

e. expected appreciation of the property securing the loan

f. a provision allowing the lender to participate in profits generated from operations conducted on the property

g. a provision allowing the lender to demand repayment prior to maturity

2. Determine the price of each of the following assuming in a yield to maturity of 5%.

a. a 10 year zero coupon loan

b. a 10 year interest only loan with a 2% coupon

c. a 10 year interest only loan with a 5% coupon

d. a 10 year interest only loan with a 7% coupon

e. a 5 year interest only loan with a 2% coupon

f. a 25 year interest only loan with a 2% coupon

g. a 10 year fully amortized loan with payments based on a 2% interest rate

h. a 10 year fully amortized loan with payments based on a 5% interest rate

i. a 10 year fully amortized loan with payments based on a 7% interest rate

j. a 5 year amortized loan with payments based on a 5% interest rate and a 10 year amortization

3. Determine the price and the percentage change in price (from a loan with a 5% yield) for each of the loans in the prior question if the yield to maturity decreases to 4%.

4a. Using the information from the prior two questions, discuss the effect of maturity (compare b with e and f, and h with j), coupon rate (compare b with c and d, and g with h and i), and amortization (compare b with g, c with h, and d with i) on the sensitivity of debt to changes in interest rates

b. Calculate the duration for each of the loans in the question 2.

c. Discuss how the answers to questions 4 a and b are related.