Question

A borrower takes out a 30-year price level adjusted mortgage loan for $200,000 with monthly payments. The initial interest rate is 4% with 4 points. Assuming that inflation is expected to increase at the rate of 3% for the next 5 years, and a fully amortizing loan is made. What is the expected effective yield to the lender if the loan is repaid in 2 years

Answer 1

Effective yield = 7%

Step-by-step explanation:

Determine the expected effective yield to the lender if Loan is repaid in 2 years

Effective annual yield =
`( 1 + IRR )^(n-1)`

n = 12 months

IRR = 0.57%

hence expected effective yield to Lender if Loan is repaid in 2 years

≈ 0.07 = 7%

Use Excel to determine the IRR Function

From the table below the IRR value = 0.57%

Below is a table showing the Year and CF values

Year CF

0 -200,000

1 $954.83

2 $954.83

3 $954.83

4 $954.83

5 $954.83

6 $954.83

7 $954.83

8 $954.83

9 $954.83

10 $954.83

11 $954.83

12 $954.83

13 $983.48

14 $983.48

15 $983.48

16 $983.48

17 $983.48

18 $983.48

19 $983.48

20 $983.48

21 $983.48

22 $983.48

23 $983.48

24 $205,538.11