calculate is also called the tax shield value of debt. Which contract offers highest amount of tarx shield value of debt? Part 4 (Extra credit, 10 pts). Suppose the customer chose Contract B and has made on-time payment for 5 years (60 monthly payments). At the beginning of year 6, she realizes that her career has taken off so well that she wants to pay off her remaining mortgage in the next five years instead of ten years. What is her monthly payment Xc between year 6 and year 10, that makes the present value of cash flows in this early repayment scenario equal to that in Contract B? Show your work. Problem #2 (30 points) Adjustable Rate Loan Assume on Jan 1st, 2017 Aaron has a S120,000 outstanding amount on an adjustable-rate loarn from the Bank of America which amortizes over 10 years. According to the loan contract, he makes payment at the end of the month. His monthly payments during year f is calculated based on the 10-year treasury bond yield in December of year (1-1), plus a 1% premium. For example, the treasury bond yield in December 2016 was 2.45%. Aaron's monthly payment in 2017 is then calculated based on an annual interest rate of 3.45%. Aaron's monthly disposable income is $1250. However, the central bank is signaling an interest rate hike in December 2017, which might lead to an increase in the 10-year treasury interest rate. (a) Calculate Aaron's monthly payment in year 2017. (b) Assume that Aaron pays all his monthly installment amounts in 2017, but spends all his remaining disposal income frivolously. How much can the 10-year treasury bond yield increase in December 2017 before Aaron will have to default on his loans in Jan 2018? (c) Assume that Aaron is very prudent and repays $1250 every month in 2017. (He repays above the requirement installment, and there is no prepayment penalty for that). Redo question (b). Problem #3 (20 points) You are a loan analyst in the mortgage department of a bank in Chicago. A customer applies for a loan to buy a house with 80% debt (and 20% equity). The price of the house is constant, equal to $500,000 and will remain constant. The penalty for re-financing or pre-payment is so high that in practice re-financing is not an option. Assume the loan is a fixed-monthly-payment type. You do the math and the customer fixed payment is supposed to pay $2000 per month for 30 years (i.e. 360 months), no matter