Youve just been appointed senior mortgage loan officer at the Wawa (Ontario) brach of the Royal Bank. A Ms. K. Wynne, who is a potential mortgagor, comes to you seeking a $750, 000 fixed-rate mortgage loan, to be originated today, in order to purchase a local home currently listed for $1, 000, 000.00. Based on her credit record and this collateral, you offer her an announced annual mortgage rate of = 5%, fixed over the life of the loan, with a renewable term of five years and an amortization period of twentyfive years. She would consider an interest-only mortgage or a constant coupon payment mortgage which has a zero balance at the end of twenty-five years.3 Prior to deciding, she asks you to show her samples of the respective monthly interest and amortization portions of the coupon payment, as well as the total monthly coupon payment itself, for each of the two types of mortgage she would consider. She also wants to know the initial balance of each mortgage if she could renew it on the same terms after her sixtieth coupon payment (that is, her first coupon payment on the renewed mortgage would occur

1 You might wish to consult the document, A Note on Canadian v. American Mortgage Rates, posted earlier on the course website.

2 Recall from class that an interest-only twenty-year Canadian mortgage features equal monthly coupon payments calculated from the actual monthly coupon rate, , corresponding to its announced annual rate, on the initial balance B0. The initial balance, in such a mortgage, remains the unpaid balance over all 240 months maturity, and consequently has a terminal balance equal to its initial balance.

3 Assume the mortgage is renewed with the same coupon rate and amortization type-schedule for each five year term in her twenty-five year amortization period; equivalently, the constant coupon mortgage has a fixed rate and an effective maturity of twenty-five years without the requirement that it be renewed every five years sixty-one months from today, once she has paid all required coupon payments at the end of the fifth year of their maturities.) Assuming the sample payments she wishes to see are those she would pay in the thirtieth and sixtieth months of her mortgage, calculate the interest, amortization and total coupon

payments owed in the thirtieth and sixtieth months of the mortgage, for the two alternative types of amortization she wants to consider:

a. the mortgage with an interest-only amortization schedule over twenty-five years.

b. the mortgage with a constant payment amortization schedule over twenty-five years.