The question asked for the PRESENT Value, and so you may have been tripped up by...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The question asked for the PRESENT Value, and so you may have been tripped up by the word "current" in "The $882,000 current market price of the apartment" answer choice. Remember - this is a debt problem. What's relevant is the amount she borrows (the mortgage balance), not the value of the apartment - because she did not borrow the full price of the apartment, and certainly not the current market price of the apartment. You may have answered "The $393,000 Laticia currently owes on the mortgage" - there's the mortgage balance, so it's got to be correct, right? Wrong again, and there's that pesky word "currently" again, to confuse you into thinking this may be the Present Value. Nope. Laticia's current mortgage balance is an accident of the moment in time we happen to be looking at their situation. With fixed rate mortgages, people borrow $X initially, and that's when the interest rate is set and fixed for the whole 30-year term of the mortgage. Then each monthly payment they make reduces the balance they owe, ever so slowly, until it's reduced all the way to zero on the day it's all paid off. The mortgage balance goes down every month, and you can't use that balance as PV - because that would mean that the interest rate also varies every month. That can't be - it's called a "fixed rate mortgage" for a reason! What you have to use for PV is "The $650,000 Laticia initially borrowed to buy the place". This may be confusing - didn't she borrow this money in the past? How can something that happened in the past be called Present Value? Think of it this way - Present Value is the lump sum that changes hands initially (which can happen in the past, present, or future) in a borrowing, saving or investing deal. And then Future Value is the lump sum, if any, that changes hands at the end of the same borrowing / saving/investing deal (which can also happen in the past, present, or future, but of course it has to happen after the time when the PV amount changed hands initially). I hope this helps clarify the issue - but definitely let me know if not, by email, in class or during Q&A. Alright, so you have your PV entry for the TVM calculation. So, what is Laticia's mortgage rate then? Enter your answer rounded to 2 decimal places with no percentage sign. For example, if the rate is 4.567%, then you would enter "4.57". The question asked for the PRESENT Value, and so you may have been tripped up by the word "current" in "The $882,000 current market price of the apartment" answer choice. Remember - this is a debt problem. What's relevant is the amount she borrows (the mortgage balance), not the value of the apartment - because she did not borrow the full price of the apartment, and certainly not the current market price of the apartment. You may have answered "The $393,000 Laticia currently owes on the mortgage" - there's the mortgage balance, so it's got to be correct, right? Wrong again, and there's that pesky word "currently" again, to confuse you into thinking this may be the Present Value. Nope. Laticia's current mortgage balance is an accident of the moment in time we happen to be looking at their situation. With fixed rate mortgages, people borrow $X initially, and that's when the interest rate is set and fixed for the whole 30-year term of the mortgage. Then each monthly payment they make reduces the balance they owe, ever so slowly, until it's reduced all the way to zero on the day it's all paid off. The mortgage balance goes down every month, and you can't use that balance as PV - because that would mean that the interest rate also varies every month. That can't be - it's called a "fixed rate mortgage" for a reason! What you have to use for PV is "The $650,000 Laticia initially borrowed to buy the place". This may be confusing - didn't she borrow this money in the past? How can something that happened in the past be called Present Value? Think of it this way - Present Value is the lump sum that changes hands initially (which can happen in the past, present, or future) in a borrowing, saving or investing deal. And then Future Value is the lump sum, if any, that changes hands at the end of the same borrowing / saving/investing deal (which can also happen in the past, present, or future, but of course it has to happen after the time when the PV amount changed hands initially). I hope this helps clarify the issue - but definitely let me know if not, by email, in class or during Q&A. Alright, so you have your PV entry for the TVM calculation. So, what is Laticia's mortgage rate then? Enter your answer rounded to 2 decimal places with no percentage sign. For example, if the rate is 4.567%, then you would enter "4.57".
Expert Answer:
Answer rating: 100% (QA)
To find Laticias mortgage rate we can use the Time Value of Money T... View the full answer
Related Book For
Accounting for Governmental and Nonprofit Entities
ISBN: 978-0078025822
17th edition
Authors: Jacqueline Reck, Suzanne Lowensohn, Earl Wilson
Posted Date:
Students also viewed these finance questions
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Determine the vector A-C, given the vectors A and C in the figure. (Figure 1) Figure B (B=26.5) 56.0% (A = 44.0) 28.0 C(C= 31.0) 1 of 1 Determine the magnitude of the vector A - . Express your...
-
Why are surveys not always the most effective way to get at innovative product uses?
-
What questions does the Simple Form Wizard ask?
-
Entropy can be mathematically expressed as (a) \(d S=\frac{d H_{\text {rev }}}{T}\) (b) \(d S=\frac{d Q_{\text {irrev }}}{T}\) (c) \(d S=\frac{d U_{\mathrm{rev}}}{T}\) (d) None of these.
-
In the final round of a TV game show, contestants have a chance to increase their current winnings of 1 million dollars to 10 million dollars. If they are wrong, their prize is decreased to $100,000....
-
Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit rate of...
-
Demonstrate how to use hypothesis testing and tests of statistical significance to interpret data from quantitative research.
-
Consider the following project where times are in weeks. Table 1. Activity times and predecessors ACTIVITY PREDECESSOR OPTIMISTIC MOST LIKELY PESSIMISTIC VARIANCE TIME TIME 6 9 9 A B C D E F G H I J...
-
Using the information, calculate the followings. Operating activities Net earings Adjustments to reconcile net eamings to cash provided by (used in) operating activities: Depreciation and...
-
Using the data, what are 2 major challenges that this restaurant is facing, and describe 2 solutions for the challenges identified Average sales Week 1 Average sales Week 2 230 250 Sales Revenue -...
-
Musashi Ltd. commenced operations on January 1, 2016. on that day, it bought: Equipment costing 3.6 million, with a useful life of 3 years. Furniture and fittings costing 2.4 million, with a useful...
-
An acre (43,560 SF) of land in the Central Business District (CBD) is being used as an open parking lot. The land currently brings an operating cashflow of $28/SF/year, paid in arrears, which is...
-
Read the grabbing story: Capture your readers attention right away, and anecdote about the problem, or another technique. Explain that if this happened, there must be a problem that should be solved
-
Highland Theatre is owned by Finnean Ferguson. At June 30, 2014, the ledger showed the following: Cash, $6,000; Land, $100,000; Buildings, $80,000; Equipment, $25,000; Accounts Payable, $5,000;...
-
Edward has the following income in 2023-24: He makes a total of 800 of Gift Aid donations during 2023-24. Compute the amount of income tax payable for the year.
-
Susan is granted a 20-year lease on a property, paying a premium of 76,000. Explain how tax relief will be given in relation to this premium if: (a) she uses the property for trading purposes, or (b)...
-
In 2023-24, Victor rents out a room in his home and receives rents of 8,150. He incurs allowable expenses of 820. What "rent-a-room" elections (if any) should he make?
Study smarter with the SolutionInn App