Assume you have just taken out a new home mortgage. You will borrow $200,000 and make equal annual payments for 20 years.

a. If the interest rate is 10% per year, how much will the payments be if you pay interest on the unpaid balance each year?

b. Construct an amortization schedule for the first two years. (There should be 5 columns: end of year, Payment, interest, principal repayment, balance; remember, you borrow today, the end or year 0)

c. If you are in the 30% marginal tax bracket, what will the net cash flow after tax to service this loan in the first year? (Think of yourself and your home mortgage and your income tax return)

d. Does the net cash flow after tax needed to service this loan get larger or smaller in future time periods?