Question

Consider a $2 million, 7.5%, 30-year mortgage with monthly payments. What is the YTM of this loan under the following circumstances?

a. No Points or penalties

b. One point of disbursement discount

c. Two points of disbursement discount

d. Two points of disbursement discount

Answer 1

a. 7.5%. No Points or penalties: With no Points or penalties, the YTM will be equal to the interest rate.

b. One point of disbursement discount

with N = 360; i = 7.5%; PV = 2,000,000; FV = 0; we can find PMT = 13,984.29; Now, reduce PV by 2% to 2,000,000 * (1-0.01) = 1,980,000 (to reflect points) so that i = 7.60%

c. d. Two points of disbursement discount
with N = 360; i = 7.5%; PV = 2,000,000; FV = 0; we can find PMT = 13,984.29; Now, reduce PV by 2% to 2,000,000 * (1-0.02) = 1,960,000 (to reflect points) so that i = 7.71%

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