Question 1

A mortgage of $360,000 can be repaid over 15 years at a nominal interest rate of 4.2% calculated monthly by the following methods:

Method A: Table Mortgage

Equal payments of principal and interest every month.

Method B: Reducing Mortgage

The same amount is paid off the principal every month plus the interest on the outstanding principal owing.

(a)For method A, calculate the amount of each payment.

(b)For method B, calculate the total interest paid.

(c)Which method would you prefer? Justify your answer.

(d)Sketch the graph of balance of loan outstanding versus time for Method A.