L 27 4. Consider a non-recourse mortgage with one payment of $10,600,000 due one year from now.The uncertain future is characterized by the following scenarios and probabilities:Scenario 1: 70% probability, property worth $13,000,000Scenario II: 20% probability, property worth $11,000,000Scenario III: 10% probability, property worth $9,000,000I.II.III.If foreclosure occurs, the (deadweight) cost paid to third parties will be $2,000,000. One-year USTreasuries are yielding 6% and investors require a risk premium of 1%.a. What would this loan sell for today if scenario III results in a deed-in-lieu, and scenario IIresults in a strategic default in which the difference between the borrower's andlender's extreme position is split 50/50?b. What is the present value cost of credit risk?

The present value is a financial concept that represents the current worth of future cash flows or…

Answered: a. What would this loan sell for today…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

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Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0% with zero points or at a rate of 5.5% with 2.25 points. If you will keep the mortgage for 30 years, what is the net present value of paying the points (to the nearest dollar)? A. $7,564 B. $7,222 C. $8,360 D. $9,475
Assume that you have a thirty-year mortgage for $200,000 that carries an interest rate of 9.00%. The mortgage was taken three years ago. Since then, assume that interest rates have come down to 7.50%, and that you are thinking of refinancing. The cost of refinancing is expected to be 2.50% of the loan. (This cost includes the points on the loan.) Assume also that you can invest your funds at 6%. Should you refinance? Give mathematical explanation.
A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.5 points. If you will keep the mortgage for 30 years, what is the present value of paying the points (to the nearest dollar) net of the cost of the points?*   $8,360 *   $6,578 *   $7,734 *   $9,475 *   $7,222
A home worth $ 1,000,000.00 will have a 70% loan at an annual mortgage rate of 8%, with the remaining30% equity. What must the net operating income (NOl) be in order to generate a 12 per cent cash oncash return?Select the correct response:$700,000.00$120.000.00$92.000.00$84.000.00$56.000.00
Suppose you are buying your first home for $210,000, and you have $15,000 for your down payment. You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month. What will your monthly payments be? Select the correct answer. a. $1,231.53 b. $1,233.53 c. $1,232.53 d. $1,234.53 e. $1,230.53
Consider the following. Two mortgages are available for $500,000.00. Both are paid monthly, compounded quarterly have terms of 5 years and are amortized over 25 years. One has an interest rate of 3% however prohibits any prepayment, the other has an interest rate of 3.1% and allows for prepayment of 10% of the balance per year. If the borrower expects to make a lump sum payment at the end of each year of $400.00 which mortgage costs the least interest by the end of the term?
Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT? a. The monthly payments will increase over time. b. A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment. c. The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity. d. The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%. e. Exactly 10% of the first monthly payment represents interest.
Assume a variable - rate mortgage of 500,000 with j 12 = 4% , amortized over 25 years with monthly payment. The term is 5 years. Now 2 years into the term, the borrower is thinking of refinancing it. How much would be the refinancing costs? Figure out exact number with these variables
ou have just purchased a home by borrowing \$400,000$400,000 for 30-years at a fixed APR of 3.87\%3.87%. What is the monthly mortgage payment? (Hint: A mortgage is just an annuity where the borrowed amount is the present value of the annuity. So, use the annuity formula, but solved for the cash flow in terms of the present value: CF = PV x R/k /(1-(1+R/K)(-txk)
Your mortgage has 24 years left, and has an APR of 6.303% with monthly payments of $1,449. a. What is the outstanding balance? b. Suppose you cannot make the mortgage payment and you are in danger of losing your house to foreclosure. The bank has offered to renegotiate your loan. The bank expects to get $161,182 for the house if it forecloses. They will lower your payment as long as they will receive at least this amount (in present value terms). If current 24-year mortgage interest rates have dropped to 4.097% (APR), what is the lowest monthly payment you could make for the remaining life of your loan that would be attractive to the bank? a. What is the outstanding balance? The outstanding balance is $______________ (Round to the nearest cent.) b. Suppose you cannot make the mortgage payment and you are in danger of losing your house to foreclosure. The bank has offered to renegotiate your loan. The bank expects to get $161,182 for the house if it forecloses.…
Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT? Exactly 8% of the first monthly payment represents interest. The monthly payments will decline over time. A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment. The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity. The amount representing interest in the first payment would be higherif the nominal interest rate were 6% rather than 8%.
Considering the following information, what is the NPV if the borrower refinances the loan? Expected holding period: 3 years; current loan balance: $400,000; current loan interest: 5.875%; remaining term on current mortgage: 15 years; new loan interest: 3.625%; new loan term: 15 years; cost of refinancing: $6,000. Assume that the opportunity cost is 10%. Should the borrower refinance

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a. What would this loan sell for today if scenario III results in a deed-in-lieu, and scenario II results in a strategic default in which the difference between the borrower's and lender's extreme position is split 50/50? b. What is the present value cost of credit risk?