Question 1

A borrower can obtain an $80,000 loan at an 8 percent interest rate with monthly
payments amortized over 25 years. Alternatively, he could obtain a $90,000 loan at
an 8.5 percent rate with the same loan term. The borrower plans to stay in the
home for the entire loan term. What is the incremental cost of borrowing the
additional funds (expressed in decimals, rounded to three digits)?

Question 2

How would your answer to question 1 change if two points were charged on the
$90,000 loan? Express your answer in decimals, rounded to three digits.

Question 3

What is the incremental cost of borrowing the additional funds in question 1 if the
borrower planned to be in the home only for five years (expressed in decimals,
rounded to three digits)?

Question 4

You have a choice between the following two identical homes: Home A is priced at
$150,000 with 80 percent financing at a 10.5 percent interest rate for 20 years.
Home B is priced at $160,000 with an assumable mortgage of $100,000 at 9
percent with 20 years remaining. Monthly payments are $899.73. A second
mortgage for $20,000 can be obtained at 13 percent interest for 20 years. At what
opportunity rate of return (IRR) would the borrower be indifferent between Home A
and Home B (expressed in decimals, rounded to three digits)?

Question 5

How would your answer to question 4 change if the seller of home B provided a
second mortgage for $20,000 at the same 9 percent rate as the assumable loan?

Question 6

A home builder is offering $100,000 loans for his homes at 9 percent for 25 years.
Current market rates are 9.5 percent for 25-year loans. The home would normally
sell for $110,000 without any special financing. At what price should the builder sell
the homes to earn, in effect, the market rate of interest on the loan (rounded to the
nearest dollar)? Assume that the buyer would have the loan for the entire 25 years.

Question 7

How would your answer to question 6 change if the home is resold after 10 years
and the loan is repaid?

Question 8

A $100,000 loan can be obtained at a 10 percent rate with monthly payments over
a 15-year term. What is the after-tax effective interest rate on the loan, assuming
the borrower is in a 30 percent tax bracket and the loan is held only three years
(expressed in decimals, rounded to two digits)? Assume that the benefit of interest
deductions for tax purposes occurs at the same time payments are made.