Question: Question 4 (6 marks): Lisa just got a VRM (variable rate mortgage) of 400,000 with requirements of monthly payments, a 3-year term and amortization of

Question 4 (6 marks): Lisa just got a VRM (variable rate mortgage) of 400,000 with requirements of monthly payments, a 3-year term and amortization of 25 years. For the first year, the rate does not change j12= 5% (12 is compounding frequency).

(a) (1 mark) what is PMT for the first year?

(b) (4 marks) At the start of the 2nd year, the rate becomes j12 =7.5%. Suppose PMT stays unchanged. Lisa tries to see how long it would take to fully retire the mortgage since the beginning of 2nd year. What would happen to the calculation of N? Does negative amortization happen? Yes or No. If Yes, then explain what causes this phenomenon.

(c) (1 mark) With the rate becoming j12 =7.5% at the start of 2nd year, suppose lender wants to adjust PMT, asking Lisa to retire the mortgage the same pace as initially scheduled, that is, 24 years to go, what would be new PMT?

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