Test Lesson 10 Flashcards
Which of the following statements regarding constant payment mortgages is TRUE?
(1) There are only three basic financial components in all constant payment mortgages:
amortization period, nominal rate of interest, and the loan amount.
(2) Constant payment mortgages are repaid by equal and consecutive instalments that include
principal and interest.
(3) If a mortgage payment frequency and interest rate compounding frequency are both monthly,
an interest rate conversion is required for mortgage finance calculations.
(4) At the end of the amortization period, a constant payment mortgage’s future value is always
equal to 10% of the loan’s face value.
2
A borrower is considering mortgage loans from two different lenders. Lender A will loan funds at a
rate of j2 = 8.5% and Lender B will loan funds at a rate of j12 = 8.6%. Which of the following represents the lowest cost of borrowing?
(1) j1 = 8.784900% with Lender B
(2) j1 = 8.839091% with Lender A
(3) j1 = 8.680625% with Lender A
(4) j1 = 8.947213% with Lender B
3
THE NEXT FOUR (4) QUESTIONS REQUIRE YOU TO COMPLETE THE TABLE - LOOK AT PAPER EXAM
Which of the following statements regarding interest rates is TRUE?
(1) Equivalent interest rates are different interest rates that result in different effective annual interest rates.
(2) Financial analysts prefer using effective rates because effective rates hide the impacts of compounding within the year.
(3) If two interest rates accumulate different amounts of interest for the same loan amount over the same time period, they have the same effective annual interest rate.
(4) Two interest rates are said to be equivalent if, for the same amount borrower, over the same period of time, the same amount is owed at the end of the period of time.
4
Which of the following statements regarding accelerating payments is TRUE?
(1) The accelerated biweekly payment method is typically most beneficial for mortgage loan
borrowers who are paid monthly.
(2) Assuming that mortgage payments are constant, the more frequent mortgage payments are made, the longer the loan’s amortization period will become.
(3) Accelerating payments enable mortgage loan borrowers to pay off mortgage loans faster and reduce their interest costs.
(4) Accelerating payments will increase interest payments for mortgage loan borrowers.
3
Which of the nominal and periodic interest rates is NOT equivalent to a periodic interest rate of iq = 3.22%?
(1) j2 = 13.087368%
(2) j12 = 12.744176%
(3) imo = 1.090614%
(4) iw = 0.244085%
3
Sharon and her husband Russ are borrowing money to purchase a home and must choose between three mortgage options. The three different loans are identical except for the rate of interest charged.
Assuming they prefer the lowest rate, which mortgage loan should Sharon and Russ choose?
Loan A: 7% per annum, compounded daily
Loan B: 6.5% per annum, compounded monthly
Loan C: 7% per annum, compounded quarterly
(1) Loan A
(2) Loan B
(3) Loan C
(4) They will be indifferent since the rates are all equivalent
2
Harwinder has recently moved to Victoria because of his new job. After renting for several months, he has now bought a house just outside the city centre. Harwinder financed the purchase with a $425,000
mortgage at an interest rate of 5.2% per annum, compounded semi-annually, amortized over 25 years with a 5-year term and monthly payments.
- What is the monthly payment?
(1) $2,520.43
(2) $2,858.59
(3) $2,151.49
(4) $1,932.94
1
Harwinder has recently moved to Victoria because of his new job. After renting for several months, he has
now bought a house just outside the city centre. Harwinder financed the purchase with a $425,000 mortgage at an interest rate of 5.2% per annum, compounded semi-annually, amortized over 25 years with
a 5-year term and monthly payments.
If we now assume that the monthly payments are rounded up to the next higher dollar, calculate the
outstanding balance at the end of the 5-year term.
(1) $399,240.50
(2) $377,289.83
(3) $404,245.30
(4) $448,053.12
2
Alex Ovichken is applying for mortgage financing in order to purchase a hockey rink. What is the
maximum loan allowable, given payments of $4,000 per month, an interest rate of 5% per annum, compounded annually, and an amortization period of 20 years?
(1) $679,999.34
(2) $611,773.77
(3) $606,101.25
(4) $691,876.11
2
A lender quotes a nominal interest rate of 7.5% per annum, compounded monthly (j12 = 7.5%). What is the equivalent nominal interest rate per annum, compounded quarterly?
(1) 7.430976%
(2) 7.618169%
(3) 7.636791%
(4) 7.546973%
4
Bruce is considering buying his dream home and has arranged a mortgage loan with a face value of $700,000, an interest rate of j2 = 7.5%, an amortization period of 25 years, and a term of 3 years. He is
considering three repayment plans with different payment frequencies:
Option 1: Constant monthly payments
Option 2: Biweekly payments
Option 3: Accelerated biweekly payments
All options require the mortgage payments to be rounded up to the next highest dollar.
If Bruce chooses Option 1, calculate the amount of principal repaid over the term, interest paid during
the term, and the outstanding balance owing at the end of the term, respectively, rounded to the
nearest dollar.
(1) $32,645; $151,711; $667,355
(2) $35,677; $152,403; $669,323
(3) $39,863; $149,187; $660,137
(4) $50,109; $149,571; $649,891
1
Bruce is considering buying his dream home and has arranged a mortgage loan with a face value of $700,000, an interest rate of j2 = 7.5%, an amortization period of 25 years, and a term of 3 years. He is
considering three repayment plans with different payment frequencies:
Option 1: Constant monthly payments
Option 2: Biweekly payments
Option 3: Accelerated biweekly payments
All options require the mortgage payments to be rounded up to the next highest dollar.
If Bruce chooses Option 2, calculate the amount of principal repaid over the term, interest paid during
the term, and the outstanding balance owing at the end of the term, respectively, rounded to the
nearest dollar.
(1) $34,645; $153,711; $662,355
(2) $50,109; $149,571; $649,891
(3) $32,677; $151,403; $667,323
(4) $39,863; $149,187; $660,137
3
Bruce is considering buying his dream home and has arranged a mortgage loan with a face value of $700,000, an interest rate of j2 = 7.5%, an amortization period of 25 years, and a term of 3 years. He is
considering three repayment plans with different payment frequencies:
Option 1: Constant monthly payments
Option 2: Biweekly payments
Option 3: Accelerated biweekly payments
All options require the mortgage payments to be rounded up to the next highest dollar.
If Bruce chooses Option 3, calculate the amount of principal repaid over the term, interest paid during
the term, and the outstanding balance owing at the end of the term, respectively, rounded to the
nearest dollar.
(1) $45,863; $139,187; $660,137
(2) $50,196; $149,562; $649,804
(3) $42,645; $131,711; $637,355
(4) $52,677; $159,403; $657,323
2
Bruce is considering buying his dream home and has arranged a mortgage loan with a face value of $700,000, an interest rate of j2 = 7.5%, an amortization period of 25 years, and a term of 3 years. He is
considering three repayment plans with different payment frequencies:
Option 1: Constant monthly payments
Option 2: Biweekly payments
Option 3: Accelerated biweekly payments
All options require the mortgage payments to be rounded up to the next highest dollar.
2
