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4-2
Inflation Expectation
Directly impacts interest rates
4-3
Prepayment Risk
Liquidity Risk
Legislative Risk
Governments periodically change the rules of the game.
As a lender, you take on the very real risk that the
government may change the laws that permit you to
collect on a legitimate debt after you have made the loan.
4-4
it r1 p1 f1
r1 = Real Rate
p1 = Risk Premiums
f1 = Inflation Rate
4-5
Periodic payments
Effective annual rate of interest
Pay Rate
Loan Balance at
Maturity
Fully Amortizing
Fully repaid
Partially Amortizing
Interest Only
= Accrual rate
= Amount Borrowed
Negative Amortizing
4-8
= $100,000
= 30 x 12 = 360
FV
i
= $0
= 7/12 = .58333
(or change P/Y to 12 and enter 7)
CPT
PMT = $665.30
4-9
4-10
Exhibit 4-2
Monthly Payment, Principal, Interest, and Loan Balances
for a Fully Amortizing, Constant Payment Mortgage
4-11
Exhibit 4-3
Relationship between Monthly Mortgage Payments and
Maturity Periods: Fully Amortizing Loans
4-12
4-13
4-14
n
FV
i
CPT
= $665.30
= 22 x 12 = 264
= $0
= 7/12 = .58333
PV
= $89,491
4-15
i
CPT
= $100,000
= 8 x 12 = 96
= $665.30
= 7/12 = .58333
FV
= $89,491
4-16
ENTER
= P2 = 96
= P1 = 1
Balance = $89,491
4-17
4-18
4-20
= 360
n
=8i
= $1467.53
PMT
But, with points paid up front, the borrower actually
receives less than the face value.
4-21
= 360
PMT = $1467.53
CPT
= 8.44%
4-23
P1 = 1
P2 = 96
ENTER
ENTER
Balance = $182,035.40
4-24
FV
= $182,035.40
PMT = $1467.53
n
CPT
= 96
= 8.72%
4-25
Truth-in-Lending
Truth-in-Lending Act
Annual Percentage Rate (APR)
4-26
Pricing FRMs
By adjusting the fees that are charged,
different effective rates of interest may be
achieved.
4-27
Exhibit 4-8
Relationship between Mortgage Yield and Financing Fees
at Various Repayment Dates
4-28