An Integrative Mini Case Problem -The Friendly Loan Company Mr. and Mrs. Leung have found the house of their dreams and are attempting to finance its purchase. The Friendly Loan Company has offered them two options, each ofwhich provides the Leungs with a $200,000 loan. Option One calls for a fixed interest rate of 9 percent per annum; this loan would be fully amortized with level annual payments over a 20-year term. Premature repayment of the mortgage is permitted at any time but a prepayment penalty of one-year's interest is levied on the amount prepaid. 17. Option Two involves a variable-rate loan; the initial interest rate is set at 8.0 percent per year and the maturity is initially set at 20 years. The mortgage payment is initially computed on a basis that will fully amortize the loan over the maturity. The interest rate on this loan is re- evaluated each year, and if market rates have changed more than a stated amount from the level of rates existing when the loan was originated, then the interest rate on the Leungs variable-rate loan would be adjusted either through an increase (decrease) in the mortgage payment (leaving the maturity unchanged); or through an extension (rcduction) of the maturity date (leaving the amount of the annual payments unchanged). Ifthe Leungs choose the variable-rate loan, they must indicate at that time which adjustment method they want employed when a change in the interest rate is called for. Premature repayment of the mortgage is pemitted without penalty