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In: Finance

12. Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments...

12. Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $3,200,000.

Mortgage A has a 4.38% interest rate and requires Ann to pay 1.5 points upfront.

Mortgage B has a 6% interest rate and requires Ann to pay zero fees upfront.

Assuming Ann makes payments for 30 years, which mortgage has the lowest cost of borrowing (ie lowest annualized IRR)? Type 1 for A, type 2 for B.

13. Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $3,200,000.

Mortgage A has a 4.38% interest rate and requires Ann to pay 1.5 points upfront.

Mortgage B has a 6% interest rate and requires Ann to pay zero fees upfront.

Assuming Ann makes payments for 2 years before she sells the house and pays the bank the balance, what is Ann’s annualized IRR from mortgage A?

14. Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $3,200,000.

Mortgage A has a 4.38% interest rate and requires Ann to pay 1.5 points upfront.

Mortgage B has a 6% interest rate and requires Ann to pay zero fees upfront.

Assuming Ann makes payments for 2 years before she sells the house and pays the bank the balance, what is Ann’s annualized IRR from mortgage B?

15. Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $3,200,000.

Mortgage A has a 4.38% interest rate and requires Ann to pay 1.5 points upfront.

Mortgage B has a 6% interest rate and requires Ann to pay zero fees upfront.

Assuming Ann makes payments for 2 years before she sells the house and pays the bank the balance, which mortgage has the lowest cost of borrowing (ie lowest annualized IRR)? Type 1 for A, type 2 for B.

16. Ann obtains a 30-year Interest Only Fixed Rate Mortgage with monthly payments for $3,200,000 at 4.38%. What will Ann’s monthly payments be?

Solutions

Expert Solution

You have asked so many independent questions in a single post. I will address the first one. Please post the balance questions separately, one by one.

First question

The correct answer is Mortgage A. Please type 1 as your answer.

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The cells highlighted in yellow contain your answer. Figures in parenthesis, if any, mean negative values. All financials are in $ mn. Adjacent cells in blue contain the formula in excel I have used to get the final output.

Parameter Linkage Mortgage A Mortgage B
Loan amount P         3,200,000       3,200,000
Upfront fees Q 1.50% 0%
Net disbursement R = P x (1 - Q)         3,152,000       3,200,000
Interest rate S 4.38% 6%
Period (years) T 30 30
Rate U = S / 12 0.3650% 0.5000%
Nper V = T x 12 360 360
PMT W = PMT(U,V,-P,0) $15,986.57 $19,185.62
IRR per month X = RATE(V,W,-R,0) 0.38% 0.50%
Annualized IRR X x 12 4.51% 6.00%

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