You are considering buying a new home for 5 million. Suppose you borrow 85% of the purchase amount and suppose first that you will pay an interest rate of 0.4% per month. a) What is the effective annual interest rate on your loan?

b) Suppose you repay the loan in equal monthly installments over 20 years, how much do you need to pay each month?

c) Suppose the effective annual interest rate increases to 14% per year. What is the new monthly interest rate?

d) In the scenario in c), what are your new monthly payments?

e) Suppose you can afford to pay mortgage payments of 20 000 per month and suppose you have 750 000 in equity. Suppose there no restrictions on how much you can borrow except for your ability to pay the monthly installments. What is the maximum bid you can afford if the monthly interest rate is 0.4%?

f) Reconsider the situation in e), but now the effective annual interest rate is 14%. What is your maximum bid?

g) Given the previous subquestions, what is the likely effect on house prices if the prevailing interest rates increase substantially? Briefly explain.