S2 - HAAS SCHOOL OF BUSINESS UNIVERSITY OF CALIFORNIA AT...

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H AAS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT B ERKELEY A VINASH V ERMA UGBA 103 H OMEWORK 2 D UE J ULY 15 2009 1. Mr. Gottlob Asturias earns $168,000 a year. He is in the market for a house, and wants to finance it with a 30-year fixed-rate mortgage loan with monthly payments. The lending institutions inform him that his loan will be approved [a] if the monthly payment on the loan does not exceed 27% of his monthly gross income, and [b] if he makes a down payment of 25% of the value of the house. The best rate that Mr. Asturias has been quoted is 6% per annum. Using the notation used in class, we are given: r Q = 6% r M = 6%/12 = 0.06/12 = 0.005. Annual Gross Income = $168,000 Monthly Gross Income = $168,000/12 = $14000 (i): What is the maximum amount that Mr. Asturias can pay as monthly installment? Monthly Installment, M = 27% of monthly gross income = 0.27*$14000 = $3780. (ii): What is the maximum amount of the loan he can raise? The amount of loan, L = PV(360 Monthly Installments) = $3780*AF(0.005, 360) = [$3780/0.005]*[1 – (1/1.005 360 )] = $3780*166.7916 = $630,472.30. (iii): What is the maximum value of the house he can buy?
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