Final answer:
The monthly mortgage payment is determined using the present value of an ordinary annuity because mortgage payments are considered regular (monthly) payments over the period of the loan. The correct answer is option D.
Step-by-step explanation:
To determine the monthly mortgage payment that Paula needs to make after putting down a 20% down payment on a $300,000 house, we need to use a time value of money concept that takes into account the regular payments made over the course of the loan. Paula's loan amount after the down payment would be 80% of the house's price, which is $300,000 * 0.80 = $240,000. The time value concept used for calculating the monthly payments of a fixed rate mortgage is the present value of an ordinary annuity.
An ordinary annuity is a series of equal payments made at the end of consecutive periods over a fixed amount of time. Since mortgage payments are typically made at the end of each month, it qualifies as an ordinary annuity, and the present value of this annuity represents the loan amount that needs to be repaid.
The computation of the monthly payment would take into account the interest rate (6% annually, converted to a monthly rate), the number of payments (which would be 30 years times 12 months per year, for a total of 360 payments), and the present value of $240,000 which is the loan principal. The formula for the present value of an ordinary annuity can be applied to solve for the monthly payment.
Therefore, the correct time value concept for determining Paula's monthly mortgage payment is option D) Present value of an ordinary annuity.