1. You are working as a nancial analyst in the mortgage lending group at CIBC. Your supervisor lurcha over to your desk and tells you that a CIBC client is interested in a xedrate mortgage loan of a 25 year maturity and an initial balance of $800, 000.00. He is agreeable to the 5.00% annual mortgage rate that CIBC would charge for such a mortgage loan to someone with his credit score, income and assets. The client is, however, also interested in comparing the payment patterns and discounted payment costs to him, when this mortgage features the contrasting cases of interest only and constant payment amortization schedules. Your supervisor expremes concern about both the market value of these alternative forms of the mortgage and also about the interest rate risk each such form poses to the bank. Given the current term structure of market interest rates, described to you below and given to you numerically in Table 1, you supervisor is particularly interested in the gains or losses to the bank, for each form of this mortgage, under two alternative scenarios for term structure changes. Each such scenario is also described below.1 He assigns you the following tasks:2 a. Using oompounding of the monthly rate and also using the oounterfactual assumption that the monthly coupon rate offered by the bank is also the constant onemonth interest rate over the next 25 years, calculate the current grow present value (initial balance at origination) for each of the two mortgage amortization types5 and the respective current market values of coupon payments in months 30, 90 and 244 for each of the two mortgage amortization types.3 . Using the term structure of market interest rates given in Table I, calculate the current market value of each form of this mortgage and also, for each of the two mortgage amortization types, as well as the respective current market values of coupon payments in months 3-0, 90 and 244. . Using the new term structure of market interest rates implied under Scenario 1, calculate the current market value of each form of this mortgage and also, for each of these forms, the current market values of coupon payments in months 30, 90 and 244. . Using the alternative new term structure implied under Scenario 2, calculate the current market value of each form of this mortgage and also, for each of these forms, the current market values of coupon payments in months 30, 90 and 244. . In order to give your supervisor a qualitative impression of the magnitude of gains or loes CIBC might face in making this loan, calculate the percentage gains or losses that would accrue to CIBC for each form of this mortgage, under each of Scenarios 1 and 2, relative to the gross present value of each form of the mortgage calculated using the assumption that the monthly interest rate always coincides with the xed monthly coupon rate on the mortgage (as assumed in part (a) above.) . Analogously, calculate the percentage gains or losses that would accrue to CIBC for each form of this mortgage, under each of Scenarios 1 and 2, relative to the original market interest rates exhibited in Table 1
