Question

Jane has been offered a Price Level Adjusted Mortgage Loan of 100,000 to purchase a small bar. The loan is to be amortized over 25 years, with annual payments. The rate is j1 = 4%. Annual inflation rates are as follows:

Year 1-3                     4%

Year 4-6                     3%

(a)   What is the adjusted OSB at the end of 3^rd year?

Answer 1

Here, Mortgage Loan = $ 100,000

Amortization Period = 25 Years

Rate = 4%

Inflation Rate = 4% (For 3 First Three Years)

Now, Calculation of Amount at the end of each month for Three Years:

Calculation Formulas:

1. Installment Amount = P (r(1+r)^n)/((1+r)^n-1) Where, P = Amount of Loan (Adjusted by Inflation Rate)

r = Annual Interest Rate/12

n = Total Number of Installments

2. Interest Amount = Amount Outstanding after each Installment * (Annual Interest Rate/12)

So, From the above calculation, we can say that adjusted OSB at the end of the 3rd year is $ 104,653.15.