Question: Answer Question 2 Consider a 5-year, fixed-rate mortgage for $100,000 with yearly payment at a nominal rate of 6%. What is the duration of the

Answer Question 2

  1. Consider a 5-year, fixed-rate mortgage for $100,000 with yearly payment at a nominal rate of 6%. What is the duration of the loan? If interest rates increase to 7% immediately after the mortgage is made, how much is the loan worth to the lender?
  1. Suppose you have two offers on the mortgage in problem 3: an interest rate of 5% or interest rate of 4% with 2 discount points. If you intend to stay in the house for 7 years, which offer do you accept, %5 or 4% with 2 discount points? Why?

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