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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%.

    Answer:- $2550

    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%.

    Answer:- $1831

    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.

    Answer:- $1464

    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.

    Answer:- $6864

    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.

    Answer:- $42,925

    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.

    Answer:- $44,078

    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.

    Answer:- $8428

    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.

    Answer:- $39,631

    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.

    Answer:- $7825

    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.

    Answer:- $11,685

    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?

    Answer:- approximately $1,464

    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

    Answer:- 307,388

    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?

    Answer:- approximately 3 months

    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.

    Answer:- Buy since IRR is 5.51%

    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.

    Answer:- $173,914

    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.

    Answer:- $9352

    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.

    Answer:- $2,749

    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.

    Answer:- $17,696

    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.

    Answer:- $14,355

    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?

    Answer:- Buying, since IRR is 9.29%

    FIN 4320 Exam 1

    FIN 4320 Exam 2

    FIN 4320 Final

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