Question

4.

Suppose a borrower with two mortgages defaults. At the time of the default, the first lien has a balance of $200,000, the second lien has a balance of $50,000. The borrower owes $5,000 in property taxes. The house sells for $150,000 in a foreclosure auction. How much of a deficiency will the first lien lender have?"

		"$50,000 "
		"$55,000 "
		"$145,000 "
		"$150,000 "

5.

"Suppose you save $50,000 today at an annual interest rate of r=5.60% compounded monthly. How much will you have in 35 years?"

		"$58,849 "
		"$336,672 "
		"$353,352 "
		"$434,325,819,142,536 "

6.

Suppose you sign up for an annuity in which you save $500, weekly for 35 years. The annuity promises you an annual interest rate of 2% compounded weekly. How much will the annuity be worth in 35 years? (Note: there are 52 weeks in a year)"

		"$17,615 "
		"$24,997 "
		"$910,000 "
		"$1,317,526 "

7.

"Suppose you buy a 30 year zero coupon bond with a face value of $1000 and a 4% annual interest rate, compounded semi-annually. 1 minute after you buy the bond, the interest rate on this bond falls to 3%, compounded semi-annually. What is the percent change in the bond price?"

		-25%
		-1%
		25%
		34.29%

Answer 1

Answer :4) Correct Option is 55,000

Reason :

Out of the sale of the House as the borrower has unpaid house taxes first out of 150,000 , 5000 will be paid . Then First lien will be paid with the remaining Amount i.e 145000 (150000 - 5000) .Therefore the deficiency in 1 st lien will be 55000 (200000 - 145000)

Answer :5) Correct Option is 353,352

Reason :

Future Value = Present Value * (1 + rate per period)^number of periods

Rate per period = 5.60% / 12= 0.46666667% or 0.004666667

Number of periods = 35 * 12 = 420

Future Value = 50000 * (1 + 0.00466667)^420

= 50000 * 7.067034

= 353,352.

Answer : 6) Correct Option is 1,317,526

Reason :

Future Value of the Annuity can be calculated using FV function of Excel

=FV(rate,nper,pmt,pv)

where

rate is rate of interest per period i.e 2% / 52

nper is the number of periods i.e 35 * 52

pmt is the periodic payments i.e 500

pv is 0

=FV(2%/52,35*52,-500,0)

Therefore Future Value is 1317526

Answer :7) Correct option is 34.29%

Reason : Calculation of Price at 4% compounded semiannually

=PV(rate,nper,pmt,fv)

where

rate is rate of interest per period i.e 4% / 2 = 2% (Divided by 2 as componded semiannually)

nper is the number of periods i.e 30 * 2 = 60 (Multiplied by 2 as componded semiannually)

pmt is the periodic payments i.e 0 (As zero coupon Bond

fv is face value i.e 1000

=PV(2%,60,60,1000)

Threfore Price is 304.78

Calculation of Price at 3% compounded semiannually

=PV(rate,nper,pmt,fv)

where

rate is rate of interest per period i.e 3% / 2 = 1.5% (Divided by 2 as componded semiannually)

nper is the number of periods i.e 30 * 2 = 60 (Multiplied by 2 as componded semiannually)

pmt is the periodic payments i.e 0 (As zero coupon Bond)

fv is face value i.e 1000

=PV(1.5%,60,60,1000)

Threfore Price is 409.30

% change = (409.30 - 304.78) / 304.78

= 34.29%