Suppose you take out a mortgage to purchase a $500,000 house that requires you to pay $70,000 at the end of each year for the next eight years. The interest rate is 8%.

a) After one year, if interest rates in the economy increase to 10%, what is the mortgage value? Is the value different for the borrower than for the lender? b) Who is happier, the lender or the borrower if rates rise to 10%? Why.

c) After one year, under what condition is the value of the mortgage and the balance outstanding exactly the same?