it is very important that you show your work from the calculations (right down what you used as PV, i FV, n, cash flows,.....etc. in your calculation)
1. (10 Points) a. True / False (explain): "The difference between an FRM (Fixed-Rate Mortgage) and a GPM (Graduate-Payment Mortgage) is that GPM's interest rate increases through time." (3 points) b. When you purchased your house 4 years ago, you took out a $300,000, 30 year FRM loan at 7.5%. You also paid 2 points to get this loan. Now you want to sell your house and buy another one. In order to do so, you must pay off the existing one. The loan came with 1% prepayment penalty. What has been your effective interest rate on this loan? (3 points) c. Matt and Jane are in the market for mortgage. Matt expects to prepay his loan in 4 years while Jane expects to hold her loan for 15 years. Ceteris paribus (everything else being the same), which of the two, Matt or Jane, is more likely to choose an ARM over an FRM? Briefly explain why. (2 points) d. You wish to borrow $200,000 for 20 years at 7% interest rate and amortize the loan by making monthly payments. You also agree to make a balloon payment of $30,000 at the end of your last month (240th month). What will be your monthly payment? (2 points)2. (6 points) a. Given the following information, which ARM should have the lowest initial interest rate? ARMI ARM2 ARM3 % Margin above index 3% 2% 3% Adjustment Interval 6 months 1 year l year Interest Rate Cap None 1% per year None (The three ARMs are identical in all other aspects) Briefly explain your answer! (2points) b. Suppose you make $65,000/year. You want to purchase a $300,000 house with a 90% LTV loan. The current 30-year FRM interest rate is at 6.5%. Your monthly insurance and property tax payment add up to $250. The lender allows a maximum Total Housing Expenses to Income rate of 35%. Will you qualify for this loan? (2 points) c. NCP bank extend a $400,000, 20-year mortgage at 5%. The interest rate increases to 6% soon after origination. Suppose the loan is expected to be prepaid in 9 years. What is the loss (interest rate risk) to the bank from the mortgage? (2 points)3.(9 points) The asking price for the property is $1,000,000; rents are estimated at $200,000 during the first year and are expected to grow at 5 percent per year. Vacancies and collection losses are expected to be 10% of rents. Operating expenses will be 35 percent of effective gross income. Capital expenditures will be 5% of effective gross income. A 30-year fixed rate loan for 70 percent of the purchase price can be obtained at 10 percent interest rate. The property is expected to appreciate at 3 percent per year and is expected to be owned for seven years and then sold. The sale cost is 6% of the sale price. The investor tells you he would also like to know how tax considerations affect your investment analysis. You determine that the building represent 90 percent of value and would be depreciated over 27.5 years. The potential investor indicates that he is in the 28 percent tax bracket. Capital gains tax rate is 20% while depreciation recapture tax rate is 25%. a. Write down the cash flows pro forma for year 1 to year 7. (5 points) b . What is the investor's expected before-tax internal rate of return on equity invested (BTIRR)? Show your work. (2 points) . What is the investor's expected after-tax internal rate of return on equity invested (ATIRR)? Show your work? (2 points)
