Answer:
a-1. Using semi-annually compounded interest rates of 4%, or 0.04, we have:
M15 = $2,389.13
M20 = $2,091.10
M25 = $1,929.54
a-2. Using semi-annually compounded interest rates of 5.5%, or 0.055
M15 = $2,841.49
M20 = $2,580.47
M25 = $2,450.28
a-3. Using semi-annually compounded interest rates of 7%, or 0.07
M15 = $3,329.35
M20 = $3,108.80
M25 = $3,009.40
b-1. It can be observed that there is a negative relationship between the month-end payment and the payment period.
b-2. It can be observed that there is a positive relationship between the month-end payment and the semi-annually compounded interest rate.
Explanation:
The month-end payment for each period can be calculated using the formula for calculating the present value (PV) of an ordinary annuity as follows:
Mn = PV / ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)
Where;
Mn = month-end payment for a particular year period = ?
PV = Present value or home value = $250,000
r = Monthly interest rate = semiannual interest rate / 6 months
n = number of months = Number of years * 12 months
Using equation (1), we have:
a. Calculate the month-end payment for 15-, 20-, and 25-year periods using semi-annually compounded interest rates of 4%, 5.5%, and 7% for each period.
a-1. Using semi-annually compounded interest rates of 4%, or 0.04
M15 = $250,000 / ((1 - (1 / (1 + (0.04/6)))^(15*12)) / (0.04 / 6)) = $2,389.13
M20 = $250,000 / ((1 - (1 / (1 + (0.04/6)))^(20*12)) / (0.04 / 6)) = $2,091.10
M25 = $250,000 / ((1 - (1 / (1 + (0.04/6)))^(25*12)) / (0.04 / 6)) = $1,929.54
a-2. Using semi-annually compounded interest rates of 5.5%, or 0.055
M15 = $250,000 / ((1 - (1 / (1 + (0.055/6)))^(15*12)) / (0.055 / 6)) = $2,841.49
M20 = $250,000 / ((1 - (1 / (1 + (0.055/6)))^(20*12)) / (0.055 / 6)) = $2,580.47
M25 = $250,000 / ((1 - (1 / (1 + (0.055/6)))^(25*12)) / (0.055 / 6)) = $2,450.28
a-3. Using semi-annually compounded interest rates of 7%, or 0.07
M15 = $250,000 / ((1 - (1 / (1 + (0.07/6)))^(15*12)) / (0.07 / 6)) = $3,329.35
M20 = $250,000 / ((1 - (1 / (1 + (0.07/6)))^(20*12)) / (0.07 / 6)) = $3,108.80
M25 = $250,000 / ((1 - (1 / (1 + (0.07/6)))^(25*12)) / (0.07 / 6)) = $3,009.40
b. What do you observe from your calculations?
Two things can be observed from the calculations:
b-1. At a particular semi-annually compounded interest rate, the month-end payment decreases as the payment period increases. This implies that there is a negative relationship between the month-end payment and the payment period.
b-2. At a particular payment period, the month-end payment increases as the semi-annually compounded interest rate increases. This implies that there is a positive relationship between the month-end payment and the semi-annually compounded interest rate.