financal market and institution chapter 14

Chapter 14
Questions
1.Securities in the mortgage markets are collateralized by real estate.
6.The down payment means that if the borrower chooses not make payments on the loan, the borrower will suffer some financial loss. This increases the likelihood that the borrower will continue to make the promised payments.
7.Lenders may require private mortgage insurance.
13.The bank accepts the home as security and advances money each month. When the borrower dies, the borrower’s estate sells the property to retire the debt.
Quantitative Problems
1.Compute the required monthly payment on a $80,000 30-year, fixed-rate mortgage with a nominal interest rate of 5.80%. How much of the payment goes toward principal and interest during the first year?
Solution:The monthly mortgage payment is computed as:
N  360; I  5.8/12; PV  80,000; FV  0
Compute PMT; PMT  $469.4024
The amortization schedule is as follows:
Month BeginningBalance Payment InterestPaid PrincipalPaid EndingBalance
1 $80,000.00 $ 469.40 $ 386.67 $ 82.74 $79,917.26
2 $79,917.26 $ 469.40 $ 386.27 $ 83.14 $79,834.13
3 $79,834.13 $ 469.40 $ 385.86 $ 83.54 $79,750.59
4 $79,750.59 $ 469.40 $ 385.46 $ 83.94 $79,666.65
5 $79,666.65 $ 469.40 $ 385.06 $ 84.35 $79,582.30
6 $79,582.30 $ 469.40 $ 384.65 $ 84.75 $79,497.55
7 $79,497.55 $ 469.40 $ 384.24 $ 85.16 $79,412.38
8 $79,412.38 $ 469.40 $ 383.83 $ 85.58 $79,326.81
9 $79,326.81 $ 469.40 $ 383.41 $ 85.99 $79,240.82
10 $79,240.82 $ 469.40 $ 383.00 $ 86.41 $79,154.41
11 $79,154.41 $ 469.40 $ 382.58 $ 86.82 $79,067.59
12 $79,067.59 $ 469.40 $ 382.16 $ 87.24 $78,980.35
Total $5,632.83 $4,613.18 $1,019.65 Alternatively: cumulative interest paid over a period of time is the total payment subtracting the principal paid. The total payments = 469.4024 x 12 = $5,632.83. The ending balance after 12 payments can be found with a financial calculator:
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