Assignment Outcomes:
1) Identify the different types of fixed-rate mortgages.
2) Calculate the difference in returns between financing options.
3) Decide which mortgage provides the better value for the purchase of a property."
Answer the following questions:
General information - You are interested in investing in a building costing £10,000,000.
Table 1: Mortgage details
|
|
Mortgage A
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Mortgage B
|
|
Interest rate per annum
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5%
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5%
|
|
Compounded
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Annually
|
Annually
|
|
Payment frequency
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Annually in arrears
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Annually in arrears
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|
Type
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Interest-only
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Constant payment
|
|
Loan-to-value ratio
|
40%
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50%
|
|
Term (years)
|
5
|
5
|
Question 1:
A) Assuming that Mortgage A is selected; calculate the levered cost of equity.
B) Assuming that Mortgage B is selected, calculate the levered cost of equity. (Answer the questions in the corresponding area of the Answer sheet).
Question 2:
A) Assuming that Mortgage A is selected; calculate the net present value of the investment. Use the cost of equity that you calculated in Question 1.1 as the appropriate discount rate. Round your calculated answer to the nearest pound.
B) Assuming that Mortgage B is selected, calculate the net present value of the investment. Use the cost of equity that you calculated in Question 1.2 as the appropriate discount rate. Round your calculated answer to the nearest pound.
C) Based on your answers in (A) and (B), state which mortgage you would choose, and justify your answer. Limit your answer to 50 words.
D) Now, assume that the net present value of the investment is identical with either mortgage (i.e. ignore your answers to 2.1 and 2.2). What would the advantage be of opting for Mortgage A? Justify your answer. Limit your answer to 100 words.
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Attachment:- Fixed-Rate Mortgages.rar