A young graduate wishes to buy a small unit house in a very remote area priced at $190,000. They want to borrow the entire amount and repay this amount in full plus interest over the next 20 years. You can offer them a mortgage for the full amount at an interest rate of 17% (sounds like extortion to me) and calls for equal annual instalment payments at the end of each of the 20 years. 

Required: 

(a) Calculate the amount of the annual payment? 

(b) Create and complete the amortization schedule. 

Consider a bond with a face value of $1000, a coupon rate of 8% (paid annually), and ten years to maturity. What is required of you: 

a. What is the price of this bond if the required rate of return (r) is 18 percent?

b. What is the price if r increases to 20 percent? By what percentage did the price of the bond change?

c. What is the price if r is five percent? If r increases to seven percent, what is the percentage change in price? 

d. From your answers in a to c, what can you say about the relative price volatility of a bond in high compared to low-interest rate environments?

Answer rating: 100% (QA)

a To calculate the annual payment we can use the formula for the present value of an annuity PV PMT x 1 1 rn r where PV is the present value of the mortgage PMT is the annual payment r is the interest ... View the full answer