1. Given an interest rate of 8.5 percent per year, what is the value at date t = 8 of a perpetual stream of $1,200 payments with the first payment at date t = 17?
2. You need a 25-year, fixed-rate mortgage to buy a new home for $220,000. Your mortgage bank will lend you the money at a 8.1 percent APR for this 300-month loan. However, you can afford monthly payments of only $800, so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment.
Required:
How large will this balloon payment have to be for you to keep your monthly payments at $800?