# Question: 1 Povero believes that interest rates are a major factor

1. Povero believes that interest rates are a major factor in the real estate market. What are the implications of rising, falling, and steady interest rates for future real estate prices?

2. If the risk-free interest rate is 3.86% and the inflation rate is 2.2%, what is the real rate of interest? Compute the rate with and without the Fisher effect.

3. Interest on a conventional thirty-year fixed-rate mortgage at the time of the case was 4.75%. At that rate, what is the monthly payment on a $290,000 mortgage? What is the monthly payment on a $261,000 mortgage?

4. At what interest rate would the monthly payments on the “pseudo $290,000 mortgage” be the same as the monthly payments on the $261,000 loan at 4.75%? Hint: Use the monthly payment rate for the $261,000 loan at 4.75% and then compute the rate if these same payments were used to pay off a loan of $290,000 over thirty years.

5. What is the EAR equivalent to an APR of 3.86% compounded monthly? Could Povero offer an even lower APR to customers who agreed to make two payments per month?

6. Would it make much difference to either the buyer or the seller whether the price of the same unit was $261,000 financed at 4.75% or $290,000 financed at 3.86%?

7. Do you think Povero could use subsidized interest rates to make its condominium units more marketable while avoiding a dispute with owners of the previously sold units?

2. If the risk-free interest rate is 3.86% and the inflation rate is 2.2%, what is the real rate of interest? Compute the rate with and without the Fisher effect.

3. Interest on a conventional thirty-year fixed-rate mortgage at the time of the case was 4.75%. At that rate, what is the monthly payment on a $290,000 mortgage? What is the monthly payment on a $261,000 mortgage?

4. At what interest rate would the monthly payments on the “pseudo $290,000 mortgage” be the same as the monthly payments on the $261,000 loan at 4.75%? Hint: Use the monthly payment rate for the $261,000 loan at 4.75% and then compute the rate if these same payments were used to pay off a loan of $290,000 over thirty years.

5. What is the EAR equivalent to an APR of 3.86% compounded monthly? Could Povero offer an even lower APR to customers who agreed to make two payments per month?

6. Would it make much difference to either the buyer or the seller whether the price of the same unit was $261,000 financed at 4.75% or $290,000 financed at 3.86%?

7. Do you think Povero could use subsidized interest rates to make its condominium units more marketable while avoiding a dispute with owners of the previously sold units?

**View Solution:**## Answer to relevant Questions

The First Federal Bank has advertised one of its loan offerings as follows:“We will lend you $100,000 for up to 5 years at an APR of 9.5% (interest compounded monthly.)” If you borrow $100,000 for 1 year and pay it off ...What is a bond? What determines the price of this financial asset?Price the bonds from the above table with monthly couponpayments.Les Company is about to issue a bond with semiannual coupon payments, a coupon rate of 10%, and par value of $1,000. The yield-to-maturity for this bond is 8%.a. What is the price of the bond if the bond matures in five, ...What is the price of the August 2003 Treasury bond (assume a $100,000 par value) with the yield to maturity from the table? Verify the current yield. Why is the current yield higher than the yield tomaturity?Post your question