Assignment 2

Rachel Harrison (Group 7)

Real Estate Finance- Assignment 2

1. Calculate the payment for a CPM. (Slide 7)

The PV for this problem = $100,000 and NPER = 30 x 12 = 360 monthly payments. The accrual rate = 0.07/12 = .0058333, and accrued interest at the end of the first month = $583.33. Therefore, the monthly payment = $583.33. This assumes that only interest is being paid off and not the principal.

2. What is the EAR if we had a 12% nominal rate here? (Slide 7)

The equivalent annual interest rate can be found using the formula EAR = (1 + i/n)n -1. By plugging in 0.12 for the interest rate and 12 as the number of compounding periods per year, an EAR of 12.67%.

3. Create the following table in Excel. (Slide 11)

Year |Month |Beg. Balance |Payment |Rate |Interest |Principal |End Balance |Cash Flow | | |0 | | | | | | |($100,000) | |1 |1 |$100,000 |$665.30 |0.07 |$583.33 |$81.97 |$99,918.03 |$665.30 | | |2 |$99,918.03 |$665.30 |0.07 |$582.86 |$82.44 |$99,835.59 |$665.30 | | |3 |$99,835.59 |$665.30 |0.07 |$582.37 |$82.93 |$99,752.66 |$665.30 | |

Every month, interest portion declines and every month, principal portion increases, while total payment remains constant.

4. From Example 1, what is the future (expected) loan balance in 8 years? (Slide 13)

For this problem, I used a PMT of $665.30 and then either the PV or FV function in Excel:

= PV(0.07/12,22*12,665.30,0) = -$89,491.65

= FV(0.07/12,8*12,665.30,-100000) = $89,491.65

I was also able to confirm the fact that the total principal paid after 8 years is $10,508.35 using the previous chart and just expanding it:

Year |Month |Beg. Balance |Payment |Rate |Interest |Principal |End Balance |Cash Flow | | |0 | | | | | | |($100,000) | |1 |1 |$100,000 |$665.30 |0.07 |$583.33 |$81.97 |$99,918.03 |$665.30 | | |2 |$99,918.03 |$665.30 |0.07 |$582.86 |$82.44 |$99,835.59 |$665.30 | | |3 |$99,835.59 |$665.30 |0.07...