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ADJUSTABLE RATE MORTGAGES
Ann found an apartment that costs $500,000. She has saved $100,000 for a down payment and will get a mortgage for $400,000. It will be a fully amortizing, 30 year, 1/1 adjustable rate mortgage with monthly payments. The initial rate is 2%. The rate will reset to 175 basis points above the LIBOR. There are no rate caps. The initial LIBOR is 1%. The following 4 questions will use this information.
a) What is Ann’s payment for the first 12 months?
b) Suppose the LIBOR remains the same in the second year as it was in the first. What is Ann’s payment in the 2nd year? (Hint: you will first need to compute Ann’s balance after the first year.)
c) What is Ann’s APR? (i.e. What is Ann’s IRR on this loan assuming the index remains the same for the life of the loan? Please give the annual IRR, so multiply the monthly IRR by 12.)
d) Suppose the LIBOR at the first reset is 7%. What is Ann’s monthly mortgage payment in the 2nd year?
Stock R has a beta of 2.1, Stock S has a beta of 0.60, the expected rate of return on an average stock is 9%, and the risk-free rate is 5%. By how much does the required return on the riskier stock exceed the required return on the riskier stock exce..
Suppose the company you work for purchased a textile mill for $25million 4 years ago. It’s current market value is $20 million, and is estimated to decline exponentially for the foreseeable future following this exponential function: When should the ..
Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 10.8% nominal yield to maturity on this ..
The company has a loan Argentinian Grill at 7 years of $ 23.500 with the local bank. His plan is to start paying the loan in seven equal installments beginning on this day. If the interest rate is 8.4%, calculates the annuity payment.
Sisters Corp expects to earn $8 per share next year. The firm’s ROE is 15% and its plowback ratio is 60%. If the firm’s market capitalization rate is 10%. Calculate the price with the constant dividend growth model. Calculate the price with no growth..
What would an investor pay for a stock, if his required rate of return is 12%, the stock next year’s dividend is $3/share, and the dividend is expected to grow at 4%?
Cummings Products Company is considering two mutually exclusive investments whose expected net cash flows are as follows. What is the crossover rate?
Suppose that today's stock price is $33.9. If the required rate on equity is 19.8% and the growth rate is 3.2%, compute the expected dividend (i.e. compute D1)
Cowbell Corp. is a manufacturer of musical instruments. There are 53 million shares, each selling at $80 / share with an equity beta of 1.02. The risk-free rate is 5% and the market risk premium is 9%. There is $1.18 billion in outstanding debt (face..
The sales forecast is often the starting point of the budgeting process. Identify and discuss key assumptions that are made in the creation of the sales forecast. How would you defend these assumptions when presenting your budget to the budget commit..
In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan is stated as $24,000 and the interest rate is 21.75%, the borrower "pays" 0.2175 × $24,000 = $5,220 immediately, thereby receiving net funds of $18,780 ..
The unused portion of a firm s credit line is usually discussed in which part of the annual financial statement? A "clean up" period is _____.
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