You are planning on buying your first home and need to borrow $250,000 from the bank. The manager offers you two mortgages: the long option will take 25 years to be paid off, and your annual payments will be $17,738. The short option will take only 10 years to be paid off, and your annual payment will be $35,200. The manager offers you the following advice: if you take the long option, you will pay $193,450 in interest ($17,738 × 25 – $250,000), while if you take the short option, you will pay only $102,000 in interest ($35,200 × 10 – $250,000)—a savings of over $91,000. Do you agree or disagree with the manager’s advice? Briefly explain your reasoning. Hint: consider opportunity cost.
Answer to relevant QuestionsBank A pays 7.25 percent interest compounded semi-annually, Bank B pays 7.20 percent compounded quarterly, and Bank C pays 7.15 percent compounded monthly. Which bank pays the highest effective annual rate?Amanda would like to borrow $50,000 to pay one year’s tuition at a private U.S. university. She would like to make quarterly payments and finish repaying the loan in five years. If the bank is quoting her a rate of 6 ...How many years will it take for an investment to double in value if the rate of return is 9 percent, and compounding occurs?a. annually?b. quarterly?A lakefront house in Kingston, Ontario, is for sale with an asking price of $499,000. The real estate market has been quite active, so the house will almost certainly attract several offers, and may sell for more than the ...Shirley has been offered two perpetuities: Grow and Shrink. Grow promises her $100 in one year and an annual cash flow that will increase by 4 percent per year forever. Shrink, in contrast, promises her $1,000 in one year ...
Post your question