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# FIN 4320 Exam 2

Question 1

A 15 year variable rate mortgage offers a first year teaser rate of 3.11%. After that the rate starts at 5% adjusted based on actual interest rates. If the mortgage is \$325,000 compute the monthly payment during the second year, if the interest rate increases to 5%.

Question 2

A 30 year variable rate mortgage offers a first year teaser rate of 3%. After that the rate starts at 5.5% adjusted based on actual interest rates. If the mortgage is \$325,000 compute the monthly payment during the second year, if the interest rate increases to 5.5%.

Question 3

There is a choice to buy a car worth \$28,000 with 100% financing at 4.99% APR for 60 month or lease at \$450 per month. The car will need maintenance in the 3rd year worth \$525 and \$825 in the 4th year. The car will have 35% residual value in the 5th year. Sales tax on new car is 6% and required rate of return is 5%.

calculate the Ownership Operating Advantage in year 3.

Question 4

There is a choice to buy a car worth \$28,000 with 100% financing at 4.99% APR for 60 month or lease at \$450 per month. The car will need maintenance in the 3rd year worth \$525 and \$825 in the 4th year. The car will have 35% residual value in the 5th year. Sales tax on new car is 6% and required rate of return is 5%.

calculate the cost of Owning this car in year 3.

Question 5

A family currently live in an apartment whose monthly rent is \$950. They are thinking of buying a house which would cost \$220,000. They plan to live in this house for 5 years and sell it at the end of the 5th year. They would put a downpayment of \$20,000 and finance the balance through a mortgage at 4% interest rate. The mortgage is to be repaid in 5 annual installments (which include both principal and interest) at the end of each year for the next 5 years The house will have the following additional expenses: annual maintenance: \$1500; Property taxes:\$5500; Insurance: \$1200. Assume they are in tax bracket of 25% and the price of home, rent and expenditure increases by 2.5% per year. Their opportunity cost or required rate of return is 5% per year. Note that property taxes are tax deductible and there no tax payable on capital gains. Use annual compounding for amortization schedule of mortgage.

Calculate the Post tax Mortgage Cost (principal repayment plus after tax interest cost) for year 1.

Question 6

A family currently live in an apartment whose monthly rent is \$950. They are thinking of buying a house which would cost \$220,000. They plan to live in this house for 5 years and sell it at the end of the 5th year. They would put a downpayment of \$20,000 and finance the balance through a mortgage at 4% interest rate. The mortgage is to be repaid in 5 annual installments (which include both principal and interest) at the end of each year for the next 5 years The house will have the following additional expenses: annual maintenance: \$1500; Property taxes:\$5500; Insurance: \$1200. Assume they are in tax bracket of 25% and the price of home, rent and expenditure increases by 2.5% per year. Their opportunity cost or required rate of return is 5% per year. Note that property taxes are tax deductible and there no tax payable on capital gains. Use annual compounding for amortization schedule of mortgage.

Calculate the Post tax Mortgage Cost (principal repayment plus after tax interest cost) for year 4.

Question 7

A family currently live in an apartment whose monthly rent is \$950. They are thinking of buying a house which would cost \$220,000. They plan to live in this house for 5 years and sell it at the end of the 5th year. They would put a downpayment of \$20,000 and finance the balance through a mortgage at 4% interest rate. The mortgage is to be repaid in 5 annual installments (which include both principal and interest) at the end of each year for the next 5 years The house will have the following additional expenses: annual maintenance: \$1500; Property taxes:\$5500; Insurance: \$1200. Assume they are in tax bracket of 25% and the price of home, rent and expenditure increases by 2.5% per year. Their opportunity cost or required rate of return is 5% per year. Note that property taxes are tax deductible and there no tax payable on capital gains. Use annual compounding for amortization schedule of mortgage.

Calculate the total cost of owning in year 4.

Question 8

A family currently live in an apartment whose monthly rent is \$950. They are thinking of buying a house which would cost \$220,000. They plan to live in this house for 5 years and sell it at the end of the 5th year. They would put a downpayment of \$20,000 and finance the balance through a mortgage at 4% interest rate. The mortgage is to be repaid in 5 annual installments (which include both principal and interest) at the end of each year for the next 5 years The house will have the following additional expenses: annual maintenance: \$1500; Property taxes:\$5500; Insurance: \$1200. Assume they are in tax bracket of 25% and the price of home, rent and expenditure increases by 2.5% per year. Their opportunity cost or required rate of return is 5% per year. Note that property taxes are tax deductible and there no tax payable on capital gains. Use annual compounding for amortization schedule of mortgage.

Calculate Ownership Operating Advantage in year 2.

Question 9

A family currently live in an apartment whose monthly rent is \$950. They are thinking of buying a house which would cost \$220,000. They plan to live in this house for 5 years and sell it at the end of the 5th year. They would put a downpayment of \$20,000 and finance the balance through a mortgage at 4% interest rate. The mortgage is to be repaid in 5 annual installments (which include both principal and interest) at the end of each year for the next 5 years The house will have the following additional expenses: annual maintenance: \$1500; Property taxes:\$5500; Insurance: \$1200. Assume they are in tax bracket of 25% and the price of home, rent and expenditure increases by 2.5% per year. Their opportunity cost or required rate of return is 5% per year. Note that property taxes are tax deductible and there no tax payable on capital gains. Use annual compounding for amortization schedule of mortgage.

Calculate the total cost of owning in year 1.

Question 10

A family currently live in an apartment whose monthly rent is \$950. They are thinking of buying a house which would cost \$220,000. They plan to live in this house for 5 years and sell it at the end of the 5th year. They would put a downpayment of \$20,000 and finance the balance through a mortgage at 4% interest rate. The mortgage is to be repaid in 5 annual installments (which include both principal and interest) at the end of each year for the next 5 years The house will have the following additional expenses: annual maintenance: \$1500; Property taxes:\$5500; Insurance: \$1200. Assume they are in tax bracket of 25% and the price of home, rent and expenditure increases by 2.5% per year. Their opportunity cost or required rate of return is 5% per year. Note that property taxes are tax deductible and there no tax payable on capital gains. Use annual compounding for amortization schedule of mortgage.

Calculate the rent saved during year 2.

Question 11

Peter buys a car worth \$22,000 by putting a downpayment of 30% and taking a loan for the balance amount. The loan carries an interest rate of 5.99% over a period of 3 years and needs to be paid on a monthly basis. What is the total interest Peter is expected to pay over the life of the loan?

Question 12

Nancy recently bought a house for \$425,000 using a 30 year home loan with 4.625% interest rate. She used 15% of the amount towards the downpayment and took loan for the balance amount. How much mortgage interest can she expect to pay during the course of this loan? Assume monthly compounding

Question 13

Olivia recently bought a house for \$325,000 using a 15 year home loan with 6.25% interest rate. She used 20% of the amount towards the downpayment and took loan for the balance amount. How many months sooner she can payoff the entire loan if she decides to make an additional payment of \$100 every month?

Question 14

A family currently live in an apartment whose monthly rent is \$950. They are thinking of buying a house which would cost \$220,000. They plan to live in this house for 5 years and sell it at the end of the 5th year. They would put a downpayment of \$20,000 and finance the balance through a mortgage at 4% interest rate. The mortgage is to be repaid in 5 annual installments (which include both principal and interest) at the end of each year for the next 5 years The house will have the following additional expenses: annual maintenance: \$1500; Property taxes:\$5500; Insurance: \$1200. Assume they are in tax bracket of 25% and the price of home, rent and expenditure increases by 2.5% per year. Their opportunity cost or required rate of return is 5% per year. Note that property taxes are tax deductible and there no tax payable on capital gains. Use annual compounding for amortization schedule of mortgage.

Question 15

Consider a 30 year fixed rate mortgage for \$175,000 at nominal interest rate of 8%. If the borrower wants to pay off the remaining balance on the mortgage after making the 9th payment, what is the remaining balance on the loan? Assume monthly payments.

Question 16

Consider a loan of \$225,000 at nominal interest rate of 6.25% for 15 years. How much of the payment during the first year goes towards principal? Assume monthly payments.

Question 17

Consider a loan of \$175,000 at nominal interest rate of 4.65% for 30 years. How much of the payment during the first year goes towards principal? Assume monthly payments.

Question 18

Consider a loan of \$220,000 at nominal interest rate of 4.65% for 10 years. How much of the payment during the first year goes towards principal? Assume monthly payments.

Question 19

Consider a loan of \$225,000 at nominal interest rate of 6.5% for 15 years. How much of the payment during the first year goes towards interest? Assume monthly payments.

Question 20

There is a choice to buy a car worth \$28,000 with 100% financing at 4.99% APR for 60 month or lease at \$450 per month. The car will need maintenance in the 3rd year worth \$525 and \$825 in the 4th year. The car will have 35% residual value in the 5th year. Sales tax on new car is 6% and required rate of return is 5%.

Which option is better?

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