Question 2 (30 marks) You are going to buy an apartment in Sham Shui Po at a price of $7 million. Suppose you have a saving of $1 million and you can borrow a mortgage loan of $6 million from Standard Chartered Bank (SCB), with a term of 25 years, at a fixed interest rate of 2.65%. (a) Name and explain two kinds of risks faced by SCB when it charges you a fixed interest rate. (6 marks) (b) Compare this Fixed Rate Mortgage (FRM) loan with a Price Level Adjusted Mortgage (PLAM) loan, which one would you prefer if inflation is going to rise? Explain. (4 marks) (c) SCB allows you to make either monthly payments or fortnightly (i.e. every two weeks) payments, calculate your monthly payments and your fortnightly payments respectively under the two options. (6 marks). (d) Suppose you finally choose to make payments fortnightly, find your loan balance after five years. (3 marks) (e) If you believe the value of your apartment will grow at 4% per year, how much will it worth after five years, assume other factors being constant? (3 marks) (f) The current plan for you is to live in the apartment and then sell it after five years. Assume there is a pre-payment penalty of 2% on the loan balance when you redeem your property after 5 years, how much is the penalty? (3 marks) (e) Taking into account of the pre-payment penalty mentioned in part (f) above, calculate the effective annual interest rate of this mortgage loan. (3 marks) (h) How much do you gain from this investment? (2 marks) END OF PAPER