Question

What rate would we need on a mortgage to be equivalent on an effective yield basis with a bond that has a 7.5% interest rate?

i dont know the frequency of periods, the professor wrote the wuestion like this

Answer 1

A	B	C	D	E	F	G	H	I
2
3		Mortgage payments are generally made monthly, therefore compounding will be monthly.
4
5		Assuming the rate for mortgage is r then the effective annual rate will be
6		Effective annual rate	=(1+r/12)12-1
7
8		Since the rate is to be equivalent to the yield of the bond which is 7.5%, therefore
9		7.5%=(1+r/12)12-1
10		Solving the above equation,
11		r=	7.25%	=12*(((1+7.5%)^(1/12))-1)
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13		Hence rate on mortgage should be	7.25%
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