Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Problem 5 - 4 7 Amortizing Loans and Inflation ( LO 3 ) Suppose you take out a $ 1 1 8 , 0 0

Problem 5-47 Amortizing Loans and Inflation (LO3)
Suppose you take out a $118,000,20-year mortgage loan to buy a condo. The interest rate on the loan is 6%. To keep things simple,
we will assume you make payments on the loan annually at the end of each year.
a. What is your annual payment on the loan?
b. Construct a mortgage amortization.
c. What fraction of your initial loan payment is interest?
d. What fraction of your initial loan payment is amortization?
e. What is the total of the loan amount paid off after 10 years (halfway through the life of the loan)?
f. If the inflation rate is 2%, what is the real value of the first (year-end) payment?
g. If the inflation rate is 2%, what is the real value of the last (year-end) payment?
h. Now assume the inflation rate is 8% and the real interest rate on the loan is unchanged. What must be the new nominal interest
rate?
i-1. Recompute the amortization table.
i-2. What is the real value of the first (year-end) payment in this high-inflation scenario?
j. What is the real value of the last payment in this high-inflation scenario?
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Finance Introduction To Institutions Investments And Management

Authors: Ronald W. Melicher, Edgar A. Norton

12th Edition

0471675792, 9780471675792

More Books

Students also viewed these Finance questions