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Question

A price level adjusted mortgage (PLAM) is made with the following terms:

 

Amount =

$95,000

 

Initial interest rate = 4 percent

 

Term — 30 years

 

Points — 6 percent

 

Payments to be reset at the beginning of each year

 

Assuming inflation is expected to increase at the rate of 6 percent per year for the next five years:

 

a. Compute the payments at the beginning of each year (BOY)

 

b. What is the loan balance at the end of the fifth year?

 

c. What is the yield to the lender on such a mortgage?

           

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