Q4 (15%) (Based on Mishkin, Ch 4, Q3) Suppose the yield to maturity on a normal $1,000 xed-payment loan with $126 yearly payments for 25 years is equal to 12%. a Write down an expression of the cash ows of the loan that relates the principal, the xed payments and the interest rate. (5%) b Suppose you take a $2000 loan that makes you pay $252 per year for 25 years. However, payments are scheduled to start in two years (you get the loan today, and then start paying by the end of year 2 and completely amortize the loan by the end of year 27). Write down an expression relating the principal, the xed payments and the yield to maturity of this loan. (5%) c Show that the yield to maturity of the loan in part b) is less than the yield to maturity in a). Hint: You should compare the (impressions in a) and b) (10%) Q5 (15%) a If the mortgage rate is 2% and the expected rate of increase in housing prices is 1%, should people getting a mortgage loan expect a positive or negative overall interest rate? (10%) b Suppose the mortgage rate increases from 2% to 4% and the expected rate of increase in housing prices changes from 1% to 5%. Are people more or less likely to buy houses? Why? (10%)