Problem $3$: Mortgage Dilemma Problem $3$: Mortgage Dilemma

You are looking at your options for a $$300,000$ mortgage $($zero down$-$payment$).$

What will be your monthly mortgage payment if you pick the $20-$year mortgage $($assume

monthly compounding$)?$

What will be your monthly mortgage payment if you pick the $30-$year mortgage $($assume

monthly compounding$)?$

Now assume annual compounding

According to the Expectations Theory, interest rates are expected to increase, decrease or

remain stable for the period between $15$ and $20$ years from now?

According to the Expectations Theory, what is the annual interest rate $($with annual com$-$

pounding$)$ that market expects for the period between twenty and thirty years from now?

You are looking at your options for a $$300,000$ mortgage $($zero down$-$payment$).$

Maturity Spot Rate

$15$ years $5\mathrm{.}56\%$

$20$ years $8\%$

$30$ years $6\%$

$1.$ What will be your monthly mortgage payment if you pick the $20-$year mortgage $($assume

monthly compounding$)?$

$2.$ What will be your monthly mortgage payment if you pick the $30-$year mortgage $($assume

monthly compounding$)?$

Now assume annual compounding

$3.$ According to the Expectations Theory, interest rates are expected to increase, decrease or

remain stable for the period between $15$ and $20$ years from now?

$4.$ According to the Expectations Theory, what is the annual interest rate $($with annual compounding$)$ that market expects for the period between twenty and thirty years from now?