Case Solution - Topic 3 (TVM)

# Case Solution - Topic 3 (TVM) - CHAPTER 5 S&S AIRS MORTGAGE...

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CHAPTER 5 S&S AIR’S MORTGAGE 1. The payment for a loan repaid with equal payments is the annuity payment with the loan value as the PV of the annuity. So, the 30-year loan payment will be: PVA = C ({1 – [1/(1 + r )] t } / r ) \$25,000,000 = C {[1 – 1 / (1 + .068/12) 360 ] / (.068/12)} C = \$162,981.30 And the monthly payments for the 20-year loan will be: PVA = C ({1 – [1/(1 + r )] t } / r ) \$25,000,000 = C {[1 – 1 / (1 + .068/12) 240 ] / (.068/12)} C = \$190,834.88 2. The interest payment is the beginning balance times the interest rate for the period, and the principal payment is the total payment minus the interest payment. The ending balance is the beginning balance minus the principal payment. The ending balance for a period is the beginning balance for the next period. The amortization table for an equal payment is: Year Beginning Balance Total Payment Interest Payment Principal Payment Ending Balance 1 \$25,000,000.00 \$162,981.30 \$141,666.67 \$21,314.63 \$24,978,685.37 2 24,978,685.37 162,981.30 141,545.88 21,435.41 24,957,249.96 3 24,957,249.96 162,981.30 141,424.42 21,556.88 24,935,693.08 4 24,935,693.08 162,981.30 141,302.26 21,679.04 24,914,014.04 5 24,914,014.04 162,981.30 141,179.41 21,801.88 24,892,212.16 6 24,892,212.16 162,981.30 141,055.87 21,925.43 24,870,286.73 3. The bi-weekly payment is one-half of the 30-year traditional mortgage payment, or: Bi-weekly payment = \$162,981.30 / 2 Bi-weekly payment = \$81,490.64 Now we have the present value of an annuity, the interest rate, and the number of payments. We need to find the number of periods of the annuity payments. Note that if you make a

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## This note was uploaded on 06/28/2010 for the course FINANCE FIN3410 taught by Professor On9 during the Spring '10 term at New England Conservatory.

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Case Solution - Topic 3 (TVM) - CHAPTER 5 S&S AIRS MORTGAGE...

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