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Problem 5 - 4 7 Amortizing Loans and Inflation ( LO 3 ) Suppose you take out a $ 1 1 8 , 0 0
Problem Amortizing Loans and Inflation LO
Suppose you take out a $year mortgage loan to buy a condo. The interest rate on the loan is 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 years halfway through the life of the loan
f If the inflation rate is what is the real value of the first yearend payment?
g If the inflation rate is what is the real value of the last yearend payment?
h Now assume the inflation rate is and the real interest rate on the loan is unchanged. What must be the new nominal interest
rate?
i Recompute the amortization table.
i What is the real value of the first yearend payment in this highinflation scenario?
j What is the real value of the last payment in this highinflation scenario?
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