Question

Suppose that the mortgage rate is 6% APR with monthly compounding. Suppose that the risk-free rate is 3% APR with monthly compounding ( at term structure).
(a) Compute the monthly mortgage payment on a $1,000,000 mortgage 30 year mortgage with monthly payments beginning at t = 1.
(b) Compute the the amortization table for t = 1 and t = 2 months. That is, for each month find the interest payment, principal reduction, and remaining principal.

Answer 1

(a) Monthly mortgage payment can be calculated by using PMT function in excel

Rate = 0.06/12 ( Since 6% is APR and a period is a month)

nper = 360 (Since there are 30 years*12 months = 360 periods)

PV = -1000000

FV = 0

We get PMT = 5995.51

Monthly mortgage payment = $5995.51

(b) Amortization table

Amount borrowed	1000000
	Periods	360
	Rate	0.005
	Payment	5995.51
Months	Beginning value	PMT	Interest payment	Principal reduction	Remaining Principal
1	$    1,000,000.00	5995.51	$ 5,000.00	995.51	$999,004.49
2	$999,004.49	5995.51	$ 4,995.02	1000.48755	$998,004.00