# YUCH#13 - CHAPTER 13 General Comments The first part of the...

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© 2005 Chris Robinson, Kwok Ho and Captus Press Inc. 13-1 CHAPTER 13 General Comments The first part of the chapter is standard mortgage mathematics. Every instructor will be familiar with this material already, and many of the students. The only complication is the Canadian law requiring compounding no more frequently than semi-annually. We have chosen to include this topic in the chapter on housing because it is directly related, and provides a good review of the time value of money. You could equally well choose to cover it with Chapter 2. Decisions relating to home ownership are a matter of personal choice, and we discuss only the financial aspects. Since different personal choices have different financial implications, we have modelled the house valuation decision in order that buyers can link their choices to the costs involved. We also discuss the owner- occupied home as a financial investment, and how that financial aspect leads into the rent versus buy decision. Personal finance books usually explain the details of how to deal with real estate agents, register titles, etc. As is generally the case, these matters vary across jurisdictions and change over time, and we have no special expertise to add. Thus, this chapter provides the conceptual basis for home ownership and mortgage decisions, but not the mundane details. We suggest that teaching by doing examples in class is suitable for this chapter. The mortgage financing problems are a review of time value, and you can teach the house valuation model by asking them to do one of the adjusted price problems without looking at Table 13.2 first. Solutions to Problems Note that for specific mortgage calculations we extend to 5 decimal places, since the differences can matter. 1. (a) 3-year mortgage (1 + .08/2) - 1 = 0.65582% 1/6 5-year mortgage (1 + .085/2) - 1 = 0.69611% 1/6 (b) Assuming a 25 year amortization 3 yr: PV = 150,000; I/Y = .65582; N = 300 PMT = \$1,144.82 per month 5 yr: PV = 150,000; I/Y = .69611; N = 300 PMT = \$1,193.05 per month (c) 3-yr: N = 264, PV = \$143,482.84 5-yr: N = 240, PV = \$138,959.09 (d) For the 3-year mortgage, the advantage is the lower interest rate, and the disadvantage is the risk of a big hike in interest rates at the end of the term. On the

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CHAPTER 13 13-2 © 2005 Chris Robinson, Kwok Ho and Captus Press Inc. other hand, as long as a family can afford the slightly higher payments on a longer-term mortgage, the 5-year mortgage lowers the risk because it insures the affordable rate for a longer period. 2. (a) k = 7.75% EAR = [(1+ k/2) - 1] 2 = [(1 + .03875) - 1] = 7.9% 2 (b) (1 + 0.079) - 1 = 0.63563% 1/12 PV = \$100,000; I/Y = .63563; N = 300 PMT = \$747.31 per month (c) At the end of year 1, N = 288, PV = \$98,612.22 At the end of year 3, N = 264, PV = \$95,498.60 (d) Calculate principal at the end of the second year: N = 276, I/Y = .63563, PV = \$97,114.57 Calculate the principal paid during the second year: \$98,612.22 - \$97,114.57 = \$1,497.66 Total interest paid during second year: \$747.31 * 12 - \$1,497.66 = \$7,470.06 3. (a) (1+ .0875/2) - 1 = 0.71622% 1/6 PV = 170,000; I/Y = .71622; N = 300 PMT = \$1,379.75 per month (b) N = 276, PV = 165,770.42 (c) (1 + .11/2) - 1 = 0.89634% 1/6 PV = 165,770.41; I/Y = .89634; N = 276 PMT = \$1,624.23 per month 4. (a) EAR = (1 + .1125/2) - 1 = .115664.
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## This note was uploaded on 10/16/2011 for the course ADMS 3541 taught by Professor Staff during the Fall '10 term at York University.

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YUCH#13 - CHAPTER 13 General Comments The first part of the...

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