Problem $5-47$ Amortizing Loans and Inflation $($LO$3)$

Suppose you take out a $$118,000,20-$year mortgage loan to buy a condo. The interest rate on the loan is $6\%.$ To keep things simple, we will assume you make payments on the loan annually at the end of each year.

a$.$ What is your annual payment on the loan?

b$.$ Construct a mortgage amortization.

c$.$ What fraction of your initial loan payment is interest?

d$.$ What fraction of your initial loan payment is amortization?

e$.$ What is the total of the loan amount paid off after $10$ years $($halfway through the life of the loan$)?$

f$.$ If the inflation rate is $2\%,$ what is the real value of the first $($year$-$end$)$ payment?

g$.$ If the inflation rate is $2\%,$ what is the real value of the last $($year$-$end$)$ payment?

h$.$ Now assume the inflation rate is $8\%$ and the real interest rate on the loan is unchanged. What must be the new nominal interest rate?

i$-1.$ Recompute the a imortization table.

$i-2.$ What is the real value of the first $($year$-$end$)$ payment in this high$-$inflation scenario?

j$.$ What is the real value of the last payment in this high$-$inflation scenario?

Answer is not complete.

Complete this question by entering your answers in the tabs below.

Req A

Req B

Req $C$ and $D$

Req I$1$

Req I$2$ and J

Construct a mortgage amortization.

Note: Do not round intermediate calculations. Round vour answers to $2$ decimal dlaces. Leave no cells blank $-$ be certain to

Problem $5-47$ Amortizing Loans and Inflation $($LO$3)$

Suppose you take out a $$118,000,20-$year mortgage loan to buy a condo. The interest rate on the loan is $6\%.$ To keep things simple, we will assume you make payments on the loan annually at the end of each year.

a$.$ What is your annual payment on the loan?

b$.$ Construct a mortgage amortization.

c$.$ What fraction of your initial loan payment is interest?

d$.$ What fraction of your initial loan payment is amortization?

e$.$ What is the total of the loan amount

f$.$ If the inflation rate is $2\%,$ what is the real value of the first $($year$-$end$)$ payment?

g$.$ If the inflation rate is $2\%,$ what is the real value of the last $($year$-$end$)$ payment?

h$.$ Now assume the inflation rate is $8\%$ and the real interest rate on the loan is unchanged. What must be the new nominal interest rate?

i$-1.$ Recompute the amortization table.

$i-2.$ What is the real value of the first $($year$-$end$)$ payment in this high$-$inflation scenario?

j$.$ What is the real value of the last payment in this high$-$inflation scenario?

Answer is not complete.

Complete this question by entering your answers in the tabs below.

Req $A$

Req B

Req $C$ and $D$

Req $E$ to $G$

Req I$1$

Req I$2$ and J

What is your annual payment on the loan?

Note: Do not round intermediate calculations. Round your answer to $2$ decimal places.

Annual payment

$

$10,287\mathrm{.}83$

The following table shows the prices of a sample of Treasury bonds, all of which have coupon rates of zero. Each bond makes a single payment at maturity.

$\backslash$table$[[$Years to$,$Price $(\%$ of$],[$Maturity$,$face value$)]]$

a$.$ What is the $1-$year interest rate?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to $2$ decimal places.

b$.$ What is the $2-$year interest rate?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to $2$ decimal places.

c$.$ What is the $3-$year interest rate?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to $2$ decimal places.

d$.$ What is the $4-$year interest rate?

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to $2$ decimal places.

e$.$ Is the yield curve upward$-$sloping, downward$-$sloping, or flat?

f$.$ Is this the usual shape of the yield curve?

Answer is complete but not entirely correct.

$\backslash$table$[[$a$.$ Interest rate,,$1\mathrm{.}68\%$