Answered step by step
Verified Expert Solution
Question
1 Approved Answer
BMO administers a mortgage on someone's house. That mortgage obligates the homeowner to pay $50,000 each year to BMO (paid in regular, small installments)
BMO administers a mortgage on someone's house. That mortgage obligates the homeowner to pay $50,000 each year to BMO (paid in regular, small installments) for the next 25 years. BMO would like to sell that mortgage to Scotiabank, so they need to approximate its value in present-day dollars. (a) Assuming a future discounting rate of 10% (as in the last question), use an integral to approximate the value of the mortgage, in present-day dollars. (Hint: this is very similar to the last question.) Then, use a calculator to approximate the result to the nearest cent. (b) Suppose BMO sells the mortgage to Scotiabank for the price you found in part (a). They put that money into an account earning a fixed interest rate, compounded continuously. No other money is put into the account, or taken out. What interest rate would the account have to earn, in order for the balance to be $1,250,000 after 25 years? ($1,250,000 is the amount of money BMO would have collected over the life of the mortgage, had they not sold it.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started