Question

Part D Loans and Mortgages

The following information is for solving Questions 31 to 35

A couple is planning to purchase a house in Nepean for a price of $350,000. They are planning to pay a down payment of $75,000 and would finance the remainder by a mortgage of $275,000 (i.e. $350,000 - $75,000 = $275,000). They are considering a 20-year mortgage, with bi-weekly payments. The quoted rate would 3.5 percent, semi-annual compounded. Calculate the following:

Question 31

What would be the Effective Annual Rate?

Question 31 options:

	3.557%
	3.561%
	3.531%
	3.5%
	None of the Above

Question 32

What would be effective bi-weekly rate?

Question 32 options:

	0.134%
	0.29%
	0.067%
	1.75%
	None of the Above

Question 33

How many bi-weekly, mortgage payments would they pay during the 20-year period?

Question 33 options:

	1040
	240
	480
	520
	None of the Above

Question 34

How much would their bi-weekly mortgage payments be?

Question 34 options:

	$732.91
	$1,338.21
	$488.73
	$366.77
	None of the Above

Question 35

How much interest would they have paid during the total 20-year period (Hint: (number of payments * amount of payments) minus loan amount)?

Question 35 options:

	$106,111.35
	$105,814.88
	$106,238.49
	$106,347.57
	None of the Above

Answer 1

Answer 31 )  3.531%

Effective rate of interest = ( 1+ i/m ) ^ m - 1

= ( 1 + 0.035/2 ) ^ 2 -1 = 3.5306 %

= 3.531%

Answer 32 ) 0.134 %

Effective bi weekly rate = 3.531 / 26 = 0.134 %

Answer 33 ) 520

Number of bi-weekly, mortgage payments paid during the 20-year period

= 52 weeks/2 * 20 years = 520

Answer 34 ) $732.91

By creating amortization table with equivalent interest rate @ 3.472%

Answer 35 ) $106,111.35

732.91* 520 - 275000 = 381113.20 - 275000 = 106113.20 ( Approx.)