Ross wants to buy a new mansion. He needs a 10m mortgage (for simplicity we ignore the currency unit from now on). He tells Barkley's Bank that he wishes to borrow over a 20-year horizon. The bank offers him two alternatives: Alternative A: A fixed rate of 3% for the whole duration. Alternative B: A floating rate of LIBOR + 1.5%, with two 10-year periods of fixed rates. Currently, the LIBOR is at 1%, so the rate will be fixed at 2.5% for the first 10 years. Then, a new, fixed interest rate will apply from year 11 to 20. It will be set according to the LIBOR on the last day of year 10. Assume that Ross is risk-neutral and believes that, in 10 years, LIBOR will either be 1.5% or 4%, with equal probabilities To simplify, assume that the mortgage is an amortising loan with annual payments." 1. Compute the annual repayment under alternative A. 2. Compute the balance at the end of year 10 under alternative B and the repayment after the new rate has been set (consider both possible rates). 3. Discuss under which conditions Alternative A is better for Ross than Alternative B. Please report your answers and explain carefully how you obtained them. Please make sure to clearly state any assumption you felt necessary to make. Your report should be self- contained, but you must submit an accompanying excel spreadsheet with your computations. Ross wants to buy a new mansion. He needs a 10m mortgage (for simplicity we ignore the currency unit from now on). He tells Barkley's Bank that he wishes to borrow over a 20-year horizon. The bank offers him two alternatives: Alternative A: A fixed rate of 3% for the whole duration. Alternative B: A floating rate of LIBOR + 1.5%, with two 10-year periods of fixed rates. Currently, the LIBOR is at 1%, so the rate will be fixed at 2.5% for the first 10 years. Then, a new, fixed interest rate will apply from year 11 to 20. It will be set according to the LIBOR on the last day of year 10. Assume that Ross is risk-neutral and believes that, in 10 years, LIBOR will either be 1.5% or 4%, with equal probabilities To simplify, assume that the mortgage is an amortising loan with annual payments." 1. Compute the annual repayment under alternative A. 2. Compute the balance at the end of year 10 under alternative B and the repayment after the new rate has been set (consider both possible rates). 3. Discuss under which conditions Alternative A is better for Ross than Alternative B. Please report your answers and explain carefully how you obtained them. Please make sure to clearly state any assumption you felt necessary to make. Your report should be self- contained, but you must submit an accompanying excel spreadsheet with your computations