Chapter 4

1. Why do the monthly payments in the beginning months of a CPM loan contain higher proportion of interest than principal repayment?

2. Why do lenders charge origination fees and loan discount fees?

3. Explain the difference between nominal and real interest rates

Chapter 4 Problems

1. A borrower obtains a fully amortizing loan for $1,175,000 at 5.75% interest for 20 years. What will be the monthly payment on the loan? If this loan had a maturity of 25years, what would be the monthly payment?

2. A fully amortizing mortgage loan is made for $165,000 at 4.75%interest for 20 years. Payments are to be made monthly. Calculate:a. Monthly payments.b. Interest and principal payments during month 1.c. Total principal and total interest paid over 20 years.d. The outstanding loan balance if the loan is repaid at the end of year 10.e. Total monthly interest and principal payments through year 10.f. What would the breakdown of interest and principal be during month 50?

3. A fully amortizing mortgage loan is made for $200,000 at 3.5% interest for 25 years. Determine payments for each of the periodsa-dbelow if interest is accrued (how often the payments are per year).a. Monthly.b. Quarterly.c. Annually.d. Weekly.

4. Regarding Problem 3, how much total interest and principal would be paid over the entire 25-year life of the mortgage in each case? Which payment pattern would have the greatest total amount of interest over the 25-year term of the loan? Why?

5. An interest-only mortgage is made for $95,000 at 4.8% interest for 10 years. The lender and borrower agree that monthly payments will be constant and will requirenoloan amortization.a. What will the monthly payments be?b. What will be the loan balance after five years?c. If the loan is repaid after five years, what will be the yield to the lender?d. Instead of being repaid after five years, what will be the yield if the loan is repaid after 10 years?

Chapter 5

Questions

1. Explain the difference between an index and spread (or margin).

2. List each of the main terms likely to be negotiated in an ARM. What does pricing an ARM using these terms mean?

3. What is the difference between interest rate risk and default risk? How do combinations of terms in ARMs affect the allocation of risk between borrowers and lenders?

Problems

1. A basic Adjustable Rate Mortgage (ARM) loan is made for $280,000 at an initial interest rate of 6.5 %for 30 years with an annual reset date. The borrower believes that the interest rate at the beginning of year (BOY) 2 will increase to 7.25%.a. Assuming that a fully amortizing loan is made, what will the monthly payments be during year 1?b. Based on (a) what will the loan balance be at the end of year (EOY) 1?c. Given that the interest rate is expected to be 7.25% at the beginning of year 2, what will the monthly payments be during year 2?d. What will be the loan balance at theEOY2?e. What would be the monthly payments in year 1 if they are to be interest only?