Chapter 6

1. A borrower is purchasing a property for $180,000 and can choose between two possible

loan alternatives. Loan A is a 90% loan for 25 years at 9% interest and 1 point and Loan

B is a 95% loan for 25 years at 9.25% interest and 1 point.

a. Assume the loans will be held to maturity, what is the incremental cost of

borrowing the extra money.

b. Assume that the loans will be repaid in 5 years. What is the incremental cost of

borrowing the extra money?

c. Rework parts (a) and (b) assuming the lender is charging 2 points on Loan A and

1 point on Loan B. What is the incremental cost of borrowing?

d. Assume Loan B now has a maturity of 20 years. What is the incremental cost of

borrowing? Both loans held to maturity with no points charged

2. Mr. Tramp made a mortgage 5 years ago for $85,000 at 8.25% interest and a 15 year

term. Rates have now risen to 10% for an equivalent loan. Mr. Tramps lender is willing

to discount the loan by $2,000 if he will prepay the loan. What rate of return would Mr.

Tramp receive by prepaying the loan?

3. A loan was made 10 years ago for $140,000 at 10.5% for a 30 year term. Rates are

currently 9.25%. What is the market value of the loan?