1. You are determining whether you should pay points to get a lower interest rate on a 15-year $200,000 mortgage. The two choices are:
a. 6%, no points
b. 5.6%, 2 points
Q1 - What are the monthly payments and effective annual interest rates of the two options?
Q2 - If you may move in five years, which one is of lower cost to you?
2. Explain the growth and sharp decline of mortgage pools in mortgage-backed securities during1985-2011.
3. Explain the structure of a Reverse Annuity Mortgage by creating an example and computing the monthly payment and explaining what happens at the maturity date of this type of mortgage. Lastly, why did these RAM's have losses during the financial crisis?
Chapter 15
1. Explain the following with a quanititative example for each one:
a. The Law of One Price
b. The Theory of Purchase Power Parity
c. The impact of an increase in the interest rate of the domestic deposits.
2. The Japanese Yen is currently Y107 to USD1.00. Interest rates in the U.S will fall over the next 6 months. The change in the exchange rate is expected to be 10%. What will the exchange rate be if this happens?