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Unformatted text preview: E Y 2 -( E [ Y ]) 2 = 3 20 5. . (a) Let X be the required payment. We have using net present value, at 1% eective per month. 400000 = Xa 120 X = 5738 . 838 (b) Since interest rates have not changed the loan outstanding is most easily calculated using the backwards recursion result Xa 70 = 287909 (c) As there have been a (unforseen) change in interest rates, and that the payment amount per month does not change, the backwards re-cursion result will not be applicable as the repayments of X for the remaining term of the loan will not be sucient to pay o the loan by the end of the 10 years. Hence we should use forward recursion, giving 287909 (1 . 015)-X = 286488 . 8 2...
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