AMORTIZATION SCHEDULE WITH A BALLOON PAYMENT You want to buy a house that costs $100,000. You have $10,000 for a down payment, but your credit is such that mort- gage companies will not lend you the required $90,000. However, the realtor persuades the seller to take a $90,000 mortgage (called a seller take-back mortgage) at a rate of 7%, provided the loan is paid off in full in 3 years. You expect to inherit $100,000 in 3 years; but right now all you have is $10,000, and you can afford to make payments of no more than $7,500 per year given your salary. (The loan would call for monthly payments, but assume end-of-year annual payments to simplify things.) a. If the loan was amortized over 3 years, how large would each annual payment be? Could you afford those payments? b. If the loan was amortized over 30 years, what would each payment be? Could you afford those payments? c. To satisfy the seller, the 30-year mortgage loan would be written as a balloon note, which means that at the end of the third year, you would have to make the regular payment plus the remaining balance on the loan. What would the loan balance be at the end of Year 3, and what would the balloon payment be?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
AMORTIZATION SCHEDULE WITH A BALLOON PAYMENT You want to buy a house that costs $100,000. You have $10,000 for a down payment, but your credit is such that mort- gage companies will not lend you the required $90,000. However, the realtor persuades the seller to take a $90,000 mortgage (called a seller take-back mortgage) at a rate of 7%, provided the loan is paid off in full in 3 years. You expect to inherit $100,000 in 3 years; but right now all you have is $10,000, and you can afford to make payments of no more
than $7,500 per year given your salary. (The loan would call for monthly payments, but assume end-of-year annual payments to simplify things.)
a. If the loan was amortized over 3 years, how large would each annual payment be? Could you afford those payments?
b. If the loan was amortized over 30 years, what would each payment be? Could you afford those payments?
c. To satisfy the seller, the 30-year mortgage loan would be written as a balloon note, which means that at the end of the third year, you would have to make the regular payment plus the remaining balance on the loan. What would the loan balance be at the end of Year 3, and what would the balloon payment be?
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