The question asked for the PRESENT Value, and so you may have been tripped up by...

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The question asked for the PRESENT Value, and so you may have been tripped up by the word "current" in "The $882,000 current market price of the apartment" answer choice. Remember - this is a debt problem. What's relevant is the amount she borrows (the mortgage balance), not the value of the apartment - because she did not borrow the full price of the apartment, and certainly not the current market price of the apartment. You may have answered "The $393,000 Laticia currently owes on the mortgage" - there's the mortgage balance, so it's got to be correct, right? Wrong again, and there's that pesky word "currently" again, to confuse you into thinking this may be the Present Value. Nope. Laticia's current mortgage balance is an accident of the moment in time we happen to be looking at their situation. With fixed rate mortgages, people borrow $X initially, and that's when the interest rate is set and fixed for the whole 30-year term of the mortgage. Then each monthly payment they make reduces the balance they owe, ever so slowly, until it's reduced all the way to zero on the day it's all paid off. The mortgage balance goes down every month, and you can't use that balance as PV - because that would mean that the interest rate also varies every month. That can't be - it's called a "fixed rate mortgage" for a reason! What you have to use for PV is "The $650,000 Laticia initially borrowed to buy the place". This may be confusing - didn't she borrow this money in the past? How can something that happened in the past be called Present Value? Think of it this way - Present Value is the lump sum that changes hands initially (which can happen in the past, present, or future) in a borrowing, saving or investing deal. And then Future Value is the lump sum, if any, that changes hands at the end of the same borrowing / saving/investing deal (which can also happen in the past, present, or future, but of course it has to happen after the time when the PV amount changed hands initially). I hope this helps clarify the issue - but definitely let me know if not, by email, in class or during Q&A. Alright, so you have your PV entry for the TVM calculation. So, what is Laticia's mortgage rate then? Enter your answer rounded to 2 decimal places with no percentage sign. For example, if the rate is 4.567%, then you would enter "4.57". The question asked for the PRESENT Value, and so you may have been tripped up by the word "current" in "The $882,000 current market price of the apartment" answer choice. Remember - this is a debt problem. What's relevant is the amount she borrows (the mortgage balance), not the value of the apartment - because she did not borrow the full price of the apartment, and certainly not the current market price of the apartment. You may have answered "The $393,000 Laticia currently owes on the mortgage" - there's the mortgage balance, so it's got to be correct, right? Wrong again, and there's that pesky word "currently" again, to confuse you into thinking this may be the Present Value. Nope. Laticia's current mortgage balance is an accident of the moment in time we happen to be looking at their situation. With fixed rate mortgages, people borrow $X initially, and that's when the interest rate is set and fixed for the whole 30-year term of the mortgage. Then each monthly payment they make reduces the balance they owe, ever so slowly, until it's reduced all the way to zero on the day it's all paid off. The mortgage balance goes down every month, and you can't use that balance as PV - because that would mean that the interest rate also varies every month. That can't be - it's called a "fixed rate mortgage" for a reason! What you have to use for PV is "The $650,000 Laticia initially borrowed to buy the place". This may be confusing - didn't she borrow this money in the past? How can something that happened in the past be called Present Value? Think of it this way - Present Value is the lump sum that changes hands initially (which can happen in the past, present, or future) in a borrowing, saving or investing deal. And then Future Value is the lump sum, if any, that changes hands at the end of the same borrowing / saving/investing deal (which can also happen in the past, present, or future, but of course it has to happen after the time when the PV amount changed hands initially). I hope this helps clarify the issue - but definitely let me know if not, by email, in class or during Q&A. Alright, so you have your PV entry for the TVM calculation. So, what is Laticia's mortgage rate then? Enter your answer rounded to 2 decimal places with no percentage sign. For example, if the rate is 4.567%, then you would enter "4.57".

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To find Laticias mortgage rate we can use the Time Value of Money T... View the full answer