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Problem 1: Consider a typical $1,500,000 Canadian mortgage. Suppose that the current nominal interest rate is 6% and the maturity is set at 20 years....
Problem 1: Consider a typical $1,500,000 Canadian mortgage. Suppose that the current nominal interest rate is 6% and the maturity is set at 20 years. The rollover period is 2 years.
a) Find the monthly payment on this mortgage.
b) Suppose the nominal interest rate moves to 7% a day after the mortgage is issued. What is the market value of this mortgage?
c) Suppose the nominal interest rate moves to 4% 2 years from now. What will be the new monthly mortgage payments?
d) The lender would like to know the effective yield at t=0 under the assumption that the mortgage interest rate will drop to 4% 2 years from its origination and will remain at 4% until the end of the mortgage's life. Formulate the equation for computing the effective annual yield.
