Question

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Consider a $100K, 15 year mortgage with 6.5% interest. What is the Present Value of the...

Consider a $100K, 15 year mortgage with 6.5% interest.

  1. What is the Present Value of the stream of principal payments? What discount rate should be used to value this stream of cash flows?

  2. What is the Present Value of the stream of interest payments? What discount rate should be used to value this stream of cash flows (remember that interest payments are tax deductible)?

(anything can help! just really want to know discount rate I should be using for each of them

Solutions

Expert Solution

First we find the instalment payment made each year.

Using financial calculator:

N = 15, I/Y = 6.5%, PV 100 , FV = 0

Compute PMT we get 10.635

Now we make the schedule payments

Discount rate for principal payments and interest payments shall be the same 6.5%

If we add the PV of principal and interest payments we get the sum as 100.

jeff jeffy answered 1 year ago
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