Marks a discuss two risks that a lender may face if

Question 2 (12 marks)
a. Discuss two risks that a lender may face if he offers a fixed-rate
mortgage loan to a borrower? (4 marks)
b. Can the lender reduce the risks you mentioned in (a) if the price-level-
adjusted mortgage (PLAM) is used? (4 marks)
c. Discuss two limitations of PLAM. (4 marks)
5

Question 3 (12 marks)
John has bought a residential flat in Mong Kok at a price of $6 million. He has
applied for a fully-amortizing mortgage loan from a bank for 25 years, and the
interest rate for the loan is “Prime rate minus 2.5%”. Given the current prime
rate is 5.5% and the maximum loan-to-value ratio is 60%.
a. How much does John borrow from the bank and what is his monthly
payments. (3 marks)
b. If the prime rate remains the same for the entire 25-year period, what
will be John’s total payment? Out of this total, how much is the interest
he paid? (3 marks)
c. If there is no change in the prime rate, what is the outstanding loan
balance if the loan is repaid by John at the end of year 7? (2 marks)