A mortgage company issues a 100,000 two-year mortgage which carries an effective annual interest rate of...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A mortgage company issues a 100,000 two-year mortgage which carries an effective annual interest rate of 5%. The mortgage is repaid by two equal payments at the end of each year. The borrower may repay the mortgage at the end of the first year without penalty. With equal probablity the interest rate at the end of the first year will go up 1%, stay the same, or go down 1%. The mortgage company can reinvest all proceeds at the new interest rate. Independently of the interest rate, the borrower has a 3% probability of defaulting at the end of the first year and a 2% probability of defaulting at the end of the second year. Assume that the borrower uses the prepayment option if it is advantagous and doesn't default. (a) Find the expected accumulated value of this mortgage to the mortgage company at the end of two years. (b) Find the standard deviation of the accumulated value of this mortgage to the mortgage company at the end of two years. (c) Find the expected yield rate of this mortgage to the mortgage company at the end of two years. (d) Find the standard deviation of the yield rate of this mortgage to the mortgage company at the end of two years. A mortgage company issues a 100,000 two-year mortgage which carries an effective annual interest rate of 5%. The mortgage is repaid by two equal payments at the end of each year. The borrower may repay the mortgage at the end of the first year without penalty. With equal probablity the interest rate at the end of the first year will go up 1%, stay the same, or go down 1%. The mortgage company can reinvest all proceeds at the new interest rate. Independently of the interest rate, the borrower has a 3% probability of defaulting at the end of the first year and a 2% probability of defaulting at the end of the second year. Assume that the borrower uses the prepayment option if it is advantagous and doesn't default. (a) Find the expected accumulated value of this mortgage to the mortgage company at the end of two years. (b) Find the standard deviation of the accumulated value of this mortgage to the mortgage company at the end of two years. (c) Find the expected yield rate of this mortgage to the mortgage company at the end of two years. (d) Find the standard deviation of the yield rate of this mortgage to the mortgage company at the end of two years.
Expert Answer:
Answer rating: 100% (QA)
a Find the expected accumulated value of this mortgage to the mortgage company at the end of two years ANS WER The expected value of the mortgage at t... View the full answer
Related Book For
Engineering Economy
ISBN: 978-0133439274
16th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Posted Date:
Students also viewed these general management questions
-
An APR of 3.75% produces an effective annual interest rate of 3.82% What is the compounding frequency (M) in this situation?
-
Bank A has an effective annual interest rate of 10%. Bank B has a nominal annual interest rate of 9.6%. a) What is the minimum number of times per year Bank B must compound their rate to be at least...
-
A bank pays a stated annual interest rate of 8 percent. What is the effective annual rate using the following types of compounding? A. Quarterly. B. Monthly. C. Continuous.
-
Determine whether the statement is true or false. If it is true, explain why. If it is false, explain why or give an example that disproves the statement.
-
Carrie and Stephen have gross salary and wages of $76,000 in 2013 and file a joint return. They have one dependent child, itemized deductions of $13,200, and a $240 child care credit. Determine their...
-
Battonkill Company, operating at full capacity, sold 112,800 units at a price of $150 per unit during 2010. Its income statement for 2010 is as follows: The division of costs between fixed and...
-
Describe the various legal risks for nurses.
-
Do cost overruns just happen, or are they caused?
-
A project has an initial cost of $35,000, expected net cash inflows of $14,000 per year for 11 years, and a cost of capital of 10%. What is the project's PI? (Hint: Begin by constructing a time...
-
Kalogridis Corp. manufactures industrial dye. The company is preparing its 2011 master budget and has presented you with the following information: a. The projected December 31, 2010, balance sheet...
-
John buys a share of stock at $54, sells it at year-end at $52, and receives a $8 year-end dividend. What is his rate of return?
-
1) What are some of the underlying reasons that multiples differ from company to company? 2) Forward-looking earnings are typically normalized, meaning they better reflect long-term cash flows by...
-
1. Are you comfortable with Atwood's forecast in exhibit 3? Do you think its feasible? 2. How could you use the past internal medicine transaction to estimate a credible bid price for Mary Washington...
-
Choose two listed companies from Bursa Malaysia, Using their most recent financial reports and stock price performance, compare, decide, and advise which company has the greatest potential for growth...
-
Do you agree or disagree with the statement below, why or why not? please share an example of Diversifiable and Nondiversifiable Risks in your response some risks are diversifiable because they are...
-
A company's degree of financial leverage is 1.1 if it is currently selling 10,000 units above its operating break even point of 15000 units. What is its degree of combined leverage rounded to two...
-
Convert between the two measurements. 870 s = min
-
The Higher the time period of the financial security the higher the. ............... risk. O a. Maturity O b. Default and Maturity Oc. Default O d. Liquidity
-
Three mutually exclusive electric-vehicle battery systems are being investigated by a large automobile manufacturer. Pertinent data are given below: a. Use the PW method to select the best battery...
-
Indicate whether each of the following statements is true (T) or false (F).(all sections) a. Interest is money paid for the use of equity capital. b. (A/F, i%, N) = (A/P, i%, N) + i. c. Simple...
-
An asset purchased for $50,000 has a depreciable life of 5 years, and it has a terminal book (salvage) value of $5,000 at the end of its depreciable life. With the straight-line method of...
-
A nickel crystals work function is measured to be 5.22 eV at 25C. As the temperature increases by 300C, the work function drops by 50 meV. By how much does this shift the threshold wavelength for...
-
A crystal sample of bacteriorhodpsin, a light-sensitive protein found in halobacteria that responds to light energy, has crystal planes separated by 0.20 nm. If a beam of 11 keV x rays illuminates a...
-
Investigators have created structures consisting of linear chains of ionized atoms on a smooth surface. Electrons are restricted to travel along the chain. The energy levels of the electrons match...
Study smarter with the SolutionInn App