Question

Please answer a-bneeds to show workings no excel

(10+5+15-30 narks) Question 2: Application of Time Value of Money (Mortgages) (30 marks) Suppose your parents wish to buy a house whose current market value is $1 50,000. They have approached a loan officer at the Bank of Nova Scotia who offers them 25-year mortgage financing for 75% of the purchase price at a rate of 6.75%, Payments are to be made on a monthly basis even though the bank is required by Canadian laws to compound the interest semi- anmally (a) What are the effective annual and monthly rates of interest on the loan? 5 marks) (b) Assuming the loan payments are due at the end of each month: (1 determine the size of the monthly loan payments (ii) determine the amortization schedule for the first 3 months (ii) determine the principal outstanding at the end of the 5th year (7 marks) (9 marks) (9 marks) Total (5+7 9+9 30 marks) MacBook Air 8

Answer 1

Bank is funding 75% of the mortgage, implies the loan amount is $112,500. Semiannual compounded interest rate is 6.75%.

1. The effectively annual rate on the loan is

= (1+.0675/2)^2 -1

= 6.86%

Similarly effectively monthly interest rate is

= effective annual interest rate / 12

= 6.86%/12

= 0.572%

2. a) The monthly instalment can be calculated using the excel sheet by formula

= PMT(rate,term, loan amount, future value)

= PMT (0.00572,300,112500,0)

= $785.39

b) The amortization schedule of first 3 month is as below

Month	Principal	Interest	Principal outstanding
1	$141.89	$643.49	$112,358.11
2	$142.71	$642.68	$112,215.40
3	$143.52	$641.86	$112,071.88

c) The loan outstanding at the end of 5th year (60th month) is $102,377.03 as shown below

Month	Principal	Interest	Principal outstanding
1	$141.89	$643.49	$112,358.11
2	$142.71	$642.68	$112,215.40
3	$143.52	$641.86	$112,071.88
4	$144.34	$641.04	$111,927.53
5	$145.17	$640.22	$111,782.36
6	$146.00	$639.39	$111,636.36
7	$146.83	$638.55	$111,489.53
8	$147.67	$637.71	$111,341.85
9	$148.52	$636.87	$111,193.33
10	$149.37	$636.02	$111,043.96
11	$150.22	$635.16	$110,893.74
12	$151.08	$634.30	$110,742.66
13	$151.95	$633.44	$110,590.71
14	$152.82	$632.57	$110,437.90
15	$153.69	$631.70	$110,284.21
16	$154.57	$630.82	$110,129.64
17	$155.45	$629.93	$109,974.18
18	$156.34	$629.04	$109,817.84
19	$157.24	$628.15	$109,660.60
20	$158.14	$627.25	$109,502.47
21	$159.04	$626.35	$109,343.43
22	$159.95	$625.44	$109,183.48
23	$160.87	$624.52	$109,022.61
24	$161.79	$623.60	$108,860.83
25	$162.71	$622.68	$108,698.12
26	$163.64	$621.74	$108,534.47
27	$164.58	$620.81	$108,369.90
28	$165.52	$619.87	$108,204.38
29	$166.47	$618.92	$108,037.91
30	$167.42	$617.97	$107,870.49
31	$168.38	$617.01	$107,702.12
32	$169.34	$616.05	$107,532.78
33	$170.31	$615.08	$107,362.47
34	$171.28	$614.10	$107,191.19
35	$172.26	$613.13	$107,018.93
36	$173.25	$612.14	$106,845.69
37	$174.24	$611.15	$106,671.45
38	$175.23	$610.15	$106,496.21
39	$176.24	$609.15	$106,319.98
40	$177.24	$608.14	$106,142.73
41	$178.26	$607.13	$105,964.48
42	$179.28	$606.11	$105,785.20
43	$180.30	$605.08	$105,604.90
44	$181.33	$604.05	$105,423.56
45	$182.37	$603.01	$105,241.19
46	$183.41	$601.97	$105,057.77
47	$184.46	$600.92	$104,873.31
48	$185.52	$599.87	$104,687.79
49	$186.58	$598.81	$104,501.21
50	$187.65	$597.74	$104,313.56
51	$188.72	$596.67	$104,124.84
52	$189.80	$595.59	$103,935.04
53	$190.89	$594.50	$103,744.16
54	$191.98	$593.41	$103,552.18
55	$193.08	$592.31	$103,359.10
56	$194.18	$591.21	$103,164.92
57	$195.29	$590.10	$102,969.63
58	$196.41	$588.98	$102,773.23
59	$197.53	$587.85	$102,575.69
60	$198.66	$586.72	$102,377.03