1. Mr. Tramp made a mortgage 5 years ago for $85,000 at 8.25% interest and a 15 year term. Rates have now risen to 10% for an equivalent loan.Mr. Tramp’s lender is willing to discount the loan by $2,000 if he will prepay the loan. What rate of return would Mr. Tramp receive by prepaying the loan?
(A) 10.24%
(B) 8.95%
(C) 14.32%
(D) 9.14%
2. Which of the following statements about the loan in the question above are TRUE?
a. The market value of the loan is higher than the book value of the loan because the market rate of interest is lower than the interest rate on the loan
b. The market value of the loan is lower than the book value of the loan because the market rate of interest is lower than the interest rate on the loan
c. The market value of the loan is higher than the book value of the loan because the market rate of interest is higher than the interest rate on the loan
d. The market value of the loan is lower than the book value of the loan because the market rate of interest is higher than the interest rate on the loan