Xian and Devi are each buying a house for $500,000. Xian puts $200,000 down and gets a mortgage for the other $300,000 at a 6% annual effective rate. Devi puts $100,00 down and gets a mortgage for the other $400,000 at the same annual rate. Both mortgages are interest only (i.e they pay 5% interest at the end of each year but do not repay any of the principal.)

a) How much leverage does Xian have? How much leverage does Devi have?

b) After 1 year, if the house increases in value by 5%, what is Xians return on his investment (ROI) in the house? What is Devis?

c) What are their respective ROIs if you include the interest they have to pay on their mortgages?

d) Devi invested only $100,000 in the house. She invests the other $100,000 (so her total investment is $200,000 matching Xians) in a savings account paying an effective annual rate of x%. What does x have to be so that her ROI on her total investment matches Xians?