1.

The Almondi family takes a 15 years mortgage of $200,000 for their new home
at 10.8% interest, compounded monthly payable i) at the end of the month ii) at the
beginning of the month. Find their monthly payments, the total of their payments
over the full term, the total interest paid over the 15 years? Monthly interest? for
both situations.

Solution:
i) Here, the mortgage has the following characteristic:
Principle amount, PV= $200,000
Interest rate, r = 10.8% = 0.108
Frequency of compounding, m = 12
Maturity Period, n = 15 years
Amount of monthly installment, R =?

We know,
𝑹 𝒓
PV = 𝒓 × {𝟏 − (𝟏 + )−𝒏𝒎 }
𝒎
𝒎

𝑃𝑉
So, R = 𝑟
1−(1+𝑚)−𝑛𝑚
{ 𝑟 }
𝑚

$200000
= 0.108
1−(1+ 12 )−15×12
{ 0.108 }
12

$200000
= 1−(1.009)−180
{ }
0.009

1
 $200000
= 1−0.1993379
{ }
0.009

$200000
= 0.8006621
{ }
0.009

$200000
=
88.9624555
= $2248.139385 (Ans)

 Total Payments Paid = R × n × m

= $2248.139385 × 15×12
= $404665.0893 (Ans)

 Total Interest Paid = Total payment paid – Principal borrowed

= $404665.0893 - $200000
= $204665.0893 (Ans)

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑

 Monthly Interest Paid =
𝑛×𝑚
$204665.0893
= 15×12
$204665.0893
= 180
= $1137.028274 (Ans)

2
 ii) Again, we know that,
𝑹 𝒓 𝑹
PV = 𝒓 × {𝟏 − (𝟏 + )−𝒏𝒎 } × (𝟏 + )
𝒎 𝑴
𝒎

𝑃𝑉 1
So, R = 𝑟 × 𝑟
1−(1+𝑚)−𝑛𝑚 (1+ )
{ } 𝑚
𝑟
𝑚

$200000 1
= 0.108 × 0.108
1−(1+ 12 )−15×12 (1+ )
{ } 12
0.108
12

$200000 1
= 1−(1.009)−180
×
{ } (1+0.009)
0.009

$200000 1
= 1−0.1993379 ×
{ } 1.009
0.009

$200000
= 0.8006621 × 0.9910802
{ }
0.009

$200000
= × 0.9910802
88.9624555
= $2248.139385 × 0.9910802
= $2228.086431 (Ans)

3
 Total Payments Paid = R × n × m
= $2228.086431 × 15×12
= $401055.5576 (Ans)

 Total Interest Paid = Total payment paid – Principal borrowed

= $401055.5576 - $200000
= $201055.5576 (Ans)

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑

 Monthly Interest Paid =
𝑛×𝑚
$𝟐𝟎𝟏𝟎𝟓𝟓.𝟓𝟓𝟕𝟔
=
15×12
$𝟐𝟎𝟏𝟎𝟓𝟓.𝟓𝟓𝟕𝟔
=
180
= $1116.97532 (Ans)

4
2. Suppose, Maha Company has $100,000 commercial mortgage with a 12 percent
annual percentage rate compounded monthly and a 20-years amortization. Further
suppose, the mortgage has a five-year balloon, what will be the monthly payment?
How big will be the balloon payment?
Solution:
Here, Principle amount, PV = $100,000
Interest rate, r = 12% = 0.12
Frequency of compounding, m = 12
Maturity period, n = 20 years
Amount of monthly installment, R =?
We know,
𝑹 𝒓
PV = 𝒓 × {𝟏 − (𝟏 + )−𝒏𝒎 }
𝒎
𝒎

PV
So, R = r
1−(1+m)−nm
{ r }
m

$100000
= 0.12
1−(1+ 12 )−20×12
{ 0.108 }
12

$100000
= 1−(1.01)−240
{ }
0.01

$100000
= 1−0.0918058
{ }
0.01

5
 $100000
= 0.9081942
{ }
0.01

$100000
=
90.81942
= $1101.086089 (Ans)

After 5 years, Maha has 20 - 5 = 15 years loan. The payment is still $1101.086089
per month, and the interest rate is still 12 percent compounded monthly.
The loan balance is thus the present value of the remaining payments;
𝑹 𝒓
PV = 𝒓 × {𝟏 − (𝟏 + )−𝒏𝒎 }
𝒎
𝒎
0.12 −15×12
1−(1+ )
12
=$1101.086089 × { 0.12 }
12

1−(1.01)−180
= $1101.086089 × { 0.01 }
1−0.1667833
=$1101.086089 × { 0.01
}
0.8332167
= $1101.086089 × { 0.01
}
= $1101.086089 × 83.322167
= $91744.33175
The balloon payment is $91744.33175 (Ans)

6
3. a) Assume that we take out a 30 - years mortgage for $100,000 at an annual interest
rate of 9% compounded monthly. If, after 10 years, interest rates drop and we want
to refinance, how much remains to be paid on our mortgage?
b) If we can refinance your mortgage for the remaining 20 years at an annual interest
rate of 7.2%, what will be our monthly payment?
c) How much will we save in interest in 20 years by paying the lower rate?

Solution:
(a) Here, Principle amount, PV = $100,000
Interest rate, r = 9% = 0.09
Frequency of compounding, m = 12
Maturity period, n = 30 years
Amount of monthly installment, R =?
We know,
𝑹 𝒓
PV = 𝒓 × {𝟏 − (𝟏 + )−𝒏𝒎 }
𝒎
𝒎

PV
So, R = r −nm
1−(1+ )
{ m }
r
m

$100000
= 0.09 −30×12
1−(1+ )
{ 12 }
0.09
12

$100000
= 1−(1.0075)−360
{ }
0.0075

7
 $100000
= 1−0.0678860
{ }
0.0075

$100000
= 0.932114
{ }
0.0075

$100000
=
124.2818667
= $804.6226105
Only 10 years have passed,
So here n = 10, m = 12
The unpaid balance U on the loan is, thus:
𝐫
𝒓 𝒏𝒎 (𝟏+𝐦)𝐧𝐦 − 𝟏
U = {𝑷𝑽(𝟏 + ) } –[R{ 𝐫 }]
𝒎
𝐦
0.09
0.09 10×12 (1+ 12 )10×12 − 1
= {$100000 (1 + ) } – [ $804.6226105 { 0.09 }]
12
12

120 (1+0.0075)120 − 1
= {$100000 (1 + 0.0075) } – [ $804.6226105 { }]
0.0075
(1.0075)120 − 1
= {$100000 (1.0075)120 } – [$804.6226105 { }]
0.0075
1.451357
= {$100000 × 2.4513570} – [$804.6226105 { }]
0.0075

= $245135.7 – [$804.6226105 × 193.5142667]

= $245136 – $155705.9544
= $89430.04559
Thus, you still owe $89430.04559 on this mortgage. (Ans)

8
(b) Here, Principle amount, PV = $89430.04559
Interest rate, r = 7.2% = 0.072
Frequency of compounding, m = 12
Maturity period, n = 20 years
Amount of monthly installment, R =?
We know,
𝑹 𝒓
PV = 𝒓 × {𝟏 − (𝟏 + )−𝒏𝒎 }
𝒎
𝒎

PV
So, R = r
1−(1+m)−nm
{ r }
m

$89430.04559
= 0.072 −20×12
1−(1+ )
{ 12 }
0.072
12
$89430.04559
= 1−(1.006)−240
{ 0.006
}

$89430.04559
= 1−0.2379494
{ 0.006
}

$89430.04559
= 0.7620506
0.006
$89430.04559
=
127.0084333
= $704.1268303 (Ans)

9
(c) If we make monthly payment on the unpaid balance for 20 years at the old

interest rate, our total payment will be:

$89430.04559 × 20 ×12 = $21463210.94

If we make monthly payment for 20 years at the new interest rate, you will pay:

$704.1268303 × 20 × 12 = $168990.4393

The difference

$21463210.94 - $168990.4393= $21294220.5

is the amount that we can save in interest over 20 years at the reduced rate. (Ans)

10
4. A debt of $10,000 is amortized by making equal payments for three
years, and interest is 6% compounded annually. Compute monthly
payment. Construct an amortization schedule.

Solution:
Here, Principle amount, PV = $10,000
Interest, r = 6% = 0.06
Frequency of compounding, m = 1
Maturity period, n = 3 years
Amount of monthly installment, R =?

We know,
𝑹 𝒓
PV = 𝒓 × {𝟏 − (𝟏 + )−𝒏𝒎 }
𝒎
𝒎

PV
So, R = r −nm
1−(1+ )
{ m }
r
m

$10000
= 0.06 −3×1
1−(1+ )
{ 2 }
0.06
1

$10000
= 1−(1.06)−3
{ }
0.06

$10000
= 1−0.8396192
{ }
0.006

11
 $10000
= 0.1603808
0.06

$10000
=
2.6730133
= $3741.096238 (Ans)
Amortization Table
Payment Beginning Monthly Interest Paid Principal Ending
Number Balance Installment (3) Paid Balance
(1) (2) = 6% × (1) (4) (5)
= (2) – (3) = (1) – (4)
1 $10000 $3741.09 $600 $3141.09 $6858.90

2 $6858.90 $3741.09 $411.53 $3329.56 $3529.34

3 $3529.34 $3741.09 $211.76 $3529.33 $0.006

12
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