A young graduate wishes to buy a small unit house in a very remote area priced at $190,000.

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A young graduate wishes to buy a small unit house in a very remote area priced at $190,000. They want to borrow the entire amount and repay this amount in full plus interest over the next 20 years. You can offer them a mortgage for the full amount at an interest rate of 17% (sounds like extortion to me) and calls for equal annual installment payments at the end of each of the 20 years.

Required: (a) Calculate the amount of the annual payment?

(b) Create and complete the amortization schedule.

Hint: Use an Excel spreadsheet to create this amortization schedule

Q 2

Consider a bond with a face value of $1000, a coupon rate of 8% (paid annually), and ten years to maturity. What is required of you:

a. What is the price of this bond if the required rate of return (r) is 18 percent?

 b. What is the price if r increases to 20 percent? By what percentage did the price of the bond change?

 c. What is the price if r is five percent? If r increases to seven percent, what is the percentage change in price?

d. From your answers in a to c, what can you say about the relative price volatility of a bond in high compared to low-interest-rate environments?




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