Finance Problems
I. An interest only ARM is made for $180,000 for 30 years. The start rate is 7 percent, with a floor on interest rate of 6%, and the borrower will (1) make monthly interest only payments for 3 years. Payments thereafter must be sufficient to fully amortize the loan at maturity.
• What will the payments be for the first 3 years?
• Assume that at the end of year 3, the reset rate is 5 percent. What will payments be?
II. A partially amortizing mortgage is made for $60,000 for a term of 10 years. The borrower and lender agree that a balance of $20,000 will remain and be repaid as a lump sum at that time. If the interest rate is 7 percent, what must monthly payments be over the 10-year period?
III. A price level adjusted mortgage (PLAM) is made with the following terms: Amount $200,000, Initial interest rate 4 percent, Term 30 years, Payments to be reset at the beginning of each year. Assuming inflation is expected to increase at the rate of 6 percent at the end of year five.
• Compute the payments at the beginning of year 3(BOY3).
• What is the loan balance at the end of the fifth year?
• What is the yield to the lender on such a mortgage?
IV. An investor is considering the acquisition of a "distressed property'' which is on Northlake Bank's REO list. The property is available for $200,000 and the investor estimates that the property will require the following total expenditures during the next year:
Inspection $ 500
Title search 1,000
Renovation 13,000
Landscaping 800
Insurance 1,800
Property taxes 6,000
Selling expenses 8,000
• The investor is wondering what such a property must sell for after one year in order to earn a 20 percent return?
• Assume you are planning to own a residential property, which approach would you choose to make the best price estimate, and why?
The response should include a reference list. One-inch margins, Using Times New Roman 12 pnt font, double-space and APA style of writing and citations.