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Quiz2_v1_solutions

# Quiz2_v1_solutions - Solutions to Quiz#2 Valuation...

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Solutions to Quiz #2: Valuation, Proformas, Leases, Fixed-rate Mortgages Computational Questions: 1. You are considering taking out a 20-year loan for \$200,000 at 8% interest. If you plan to sell your property after 4 years, and the bank is charging 2 points to originate the loan, what is your effective cost of borrowing? a. 8% b. 8.3% c. 8.6% d. 8.8% e. 10% Step 1: Solve for PMT PV = 200000 FV = 0 N = 240 I = 8% PMT = -1672.88 Step 2: Solve for FV after 4 years N = 48 FV = 180866.57 Step 3-4: Adjust PV to reflect the net disbursement of funds after points are deducted and re-solve for I PV = .98*200000 = 196000 FV = 180866.57 N = 48 PMT = -1672.88 I = 8.61%, so the answer is (c). 2. You are considering taking out a 20-year loan for \$200,000 at 8% interest. If you plan to sell your property after 4 years, how much will you owe the bank upon repayment if the bank charges a prepayment penalty on a 5-5-4-4-3-3- 2-2-1-1 schedule? Steps 1 and 2 same as above Prepayment penalty is 4% of the OLB according to the penalty schedule. So total amount owed is 180866.57*1.04 = 188101.23 The answer is (a).

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3. You are considering taking out a 20-year loan for \$200,000 at 8% interest. How much interest will be paid from months 43-48 (inclusive)? Step 1 and 2 are the same as above. To use the brute force method, we just need to find the total payment for 6 months and the OLB at the end of month 42 (so that we can find the total principal paid). Total PMT = 6*1672.88 = 10037.28 PV = 200000 N = 42 I = 8% PMT = -1672.88 FV = -183604.94 The difference in the OLBs at the end of Mo. 42 and 48 is the total principal paid: 183604.94 – 180866.57 = 2738.37 Finally, we subtract the total principal from the total PMT: 10037.28 – 2738.37 = 7298.91 So the answer is (b). Using the HP17BII+ calculator shortcut, after solving for the 1672.88 PMT, OTHER AMRT 42 #P 6 #P INT

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Quiz2_v1_solutions - Solutions to Quiz#2 Valuation...

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