1. A couple borrows $200,000 for a mortgage that requires fixed monthly payments

ID: 1175002 • Letter: 1

Question

1. A couple borrows $200,000 for a mortgage that requires fixed monthly payments over 30 consecutive years. The first monthly payment is due in one month. If the interest rate on the mortgage is 5%, which of the following comes closest to the monthly payment?

2. When would the calculation of the effective annual interest rate be most useful?

When comparing two investments with different annuity amounts

When comparing two investments with different par values

When comparing two investments that end at different points in time

When comparing two investments that compound differently within a year

When comparing two investments that have different inherent risk

When comparing two investments with different annuity amounts

When comparing two investments with different par values

When comparing two investments that end at different points in time

When comparing two investments that compound differently within a year

When comparing two investments that have different inherent risk

Explanation / Answer

Monthly payment = $1,073.64

Using financial calculator BA II Plus - Input details:

I/Y = Rate = 5/12 =

0.416667

FV = Future value =

N = Total payment term = 25*12 =

360

PV = Present value of loan =

-$200,000

CPT > PMT = Monthly Payment =

$1,073.64

Correct option is > d. When comparing two investments that compound differently within a year