Apartment amount 175,000

Downpayment (20%) 35,000

Borrowed amount 140,000
time 15 years
Payment number 180
rate/ year 7.75%
Rate/month 0.6458%
1/ You plan to purchase a $175,000 house using a 15-year mortgage obtained from your
local bank. The mortgage rate offered to you is 7.75 percent. You will make a down
payment of 20 percent of the purchase
a. Calculate your monthly payments on this mortgage.
Monthly payment ($1,317.79)

b. Calculate the amount of interest and, separately, principal paid in the 60th payment.
Interest paid (iPMT) ($713.07)
Principle paid ($604.72)

c. Calculate the amount of interest and, separately, principal paid in the 180th payment.
Interest paid (iPMT) ($8.46)
Principle paid ($1,309.33)

d. Calculate the amount of interest paid over the life of this mortgage.
Total payment ($237,201.49)
Interest paid= Total payment amount - Borrowed amount $97,201.49
Apartment amount 150,000

Downpayment (20%) 30,000

Borrowed amount 120,000
time 15 years
Payment number 180
rate/ year 5.25%
Rate/month 0.4375%

Amount:
Interest Ra
Term

No.

1
2
3
4
5
6
2/ You plan to purchase a $150,000 house using a 15-year mortgage
obtained from your local credit union. The mortgage rate offered to
you is 5.25 percent. You will make a down payment of 20 percent of
the purchase price.
a. Calculate your monthly payments on this mortgage.
Monthly payment ($964.65)

b. Construct the amortization schedule for the first six payments.

AMORTIZED PAYMENT SCHEDULE

120,000.00
5.25% p.a.
180month

(1)=PMT=(2)+ (3) (2)=(1)-(3) (3)=(4)*r/12

Payment (1) Principal (2) Interest ( 3)

$964.65 439.65 525.00

$964.65 441.57 523.08
$964.65 443.51 521.14
$964.65 445.45 519.20
$964.65 447.39 517.26
$964.65 449.35 515.30
(4)=A-(2)
Balance (4)
120,000
119,560
119,119
118,675
118,230
117,782
117,333
Apartment amount 220,000

Downpayment (20%) 44,000

Borrowed amount 176,000
time 15 years
Payment number 180
rate/ year 4.75%
Rate/month 0.3958%

Amount:
Interest Ra
Term

No.

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
 76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
3/ You plan to purchase a $220,000 house using a 15-year mortgage obtained from your bank. The
mortgage rate offered to you is 4.75 percent. You will make a down payment of 20 percent of the
purchase price.
a. Calculate your monthly payments on this mortgage.
Monthly payment

b. Construct the amortization schedule for the mortgage. How much total interest is paid on this mortgage?
Total payment amount
Interest paid = Total payment amount - Borrowed amount

AMORTIZED PAYMENT SCHEDULE

176,000.00
4.75% p.a.
180month

(1)=PMT=(2)+ (3)
Payment (1)

$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
$1,368.98
 ($1,368.98)

his mortgage?
($246,417.15)
70417.15

(2)=(1)-(3) (3)=(4)*r/12 (4)=A-(2)

Principal (2) Interest ( 3) Balance (4)
176,000
672.37 696.61 175,328
675.03 693.95 174,653
677.71 691.27 173,975
680.39 688.59 173,295
683.08 685.90 172,611
685.78 683.20 171,926
688.50 680.48 171,237
691.22 677.76 170,546
693.96 675.02 169,852
696.71 672.27 169,155
699.46 669.52 168,456
702.23 666.75 167,754
705.01 663.97 167,049
707.80 661.18 166,341
710.60 658.38 165,630
713.42 655.56 164,917
716.24 652.74 164,200
719.07 649.91 163,481
721.92 647.06 162,759
724.78 644.20 162,035
727.65 641.33 161,307
730.53 638.45 160,577
733.42 635.56 159,843
736.32 632.66 159,107
739.24 629.74 158,368
742.16 626.82 157,625
745.10 623.88 156,880
748.05 620.93 156,132
751.01 617.97 155,381
753.98 615.00 154,627
756.97 612.01 153,870
759.96 609.02 153,110
762.97 606.01 152,347
765.99 602.99 151,581
769.02 599.96 150,812
772.06 596.92 150,040
775.12 593.86 149,265
778.19 590.79 148,487
781.27 587.71 147,706
784.36 584.62 146,921
787.47 581.51 146,134
790.58 578.40 145,343
793.71 575.27 144,550
796.85 572.13 143,753
800.01 568.97 142,953
803.17 565.81 142,150
806.35 562.63 141,343
809.54 559.44 140,534
812.75 556.23 139,721
815.96 553.02 138,905
819.19 549.79 138,086
822.44 546.54 137,263
825.69 543.29 136,438
828.96 540.02 135,609
832.24 536.74 134,776
835.53 533.45 133,941
838.84 530.14 133,102
842.16 526.82 132,260
845.50 523.48 131,414
848.84 520.14 130,566
852.20 516.78 129,713
855.57 513.41 128,858
858.96 510.02 127,999
862.36 506.62 127,136
865.77 503.21 126,271
869.20 499.78 125,401
872.64 496.34 124,529
876.09 492.89 123,653
879.56 489.42 122,773
883.04 485.94 121,890
886.54 482.44 121,004
890.05 478.93 120,114
893.57 475.41 119,220
897.11 471.87 118,323
900.66 468.32 117,422
 904.22 464.76 116,518
907.80 461.18 115,610
911.39 457.59 114,699
915.00 453.98 113,784
918.62 450.36 112,865
922.26 446.72 111,943
925.91 443.07 111,017
929.57 439.41 110,087
933.25 435.73 109,154
936.95 432.03 108,217
940.66 428.32 107,277
944.38 424.60 106,332
948.12 420.86 105,384
951.87 417.11 104,432
955.64 413.34 103,477
959.42 409.56 102,517
963.22 405.76 101,554
967.03 401.95 100,587
970.86 398.12 99,616
974.70 394.28 98,641
978.56 390.42 97,663
982.43 386.55 96,680
986.32 382.66 95,694
990.22 378.76 94,704
994.14 374.84 93,710
998.08 370.90 92,712
1,002.03 366.95 91,710
1,005.99 362.99 90,704
1,009.98 359.00 89,694
1,013.97 355.01 88,680
1,017.99 350.99 87,662
1,022.02 346.96 86,640
1,026.06 342.92 85,614
1,030.12 338.86 84,583
1,034.20 334.78 83,549
1,038.29 330.69 82,511
1,042.40 326.58 81,469
1,046.53 322.45 80,422
1,050.67 318.31 79,371
1,054.83 314.15 78,317
1,059.00 309.98 77,258
1,063.19 305.79 76,194
1,067.40 301.58 75,127
1,071.63 297.35 74,055
1,075.87 293.11 72,979
1,080.13 288.85 71,899
1,084.40 284.58 70,815
1,088.69 280.29 69,726
1,093.00 275.98 68,633
1,097.33 271.65 67,536
1,101.67 267.31 66,434
1,106.03 262.95 65,328
1,110.41 258.57 64,218
1,114.81 254.17 63,103
1,119.22 249.76 61,984
1,123.65 245.33 60,860
1,128.10 240.88 59,732
1,132.56 236.42 58,599
1,137.04 231.94 57,462
1,141.54 227.44 56,321
1,146.06 222.92 55,175
1,150.60 218.38 54,024
1,155.15 213.83 52,869
1,159.72 209.26 51,709
1,164.31 204.67 50,545
1,168.92 200.06 49,376
1,173.55 195.43 48,203
1,178.19 190.79 47,024
1,182.86 186.12 45,841
1,187.54 181.44 44,654
1,192.24 176.74 43,462
1,196.96 172.02 42,265
1,201.70 167.28 41,063
1,206.45 162.53 39,857
1,211.23 157.75 38,645
1,216.02 152.96 37,429
1,220.83 148.15 36,208
1,225.67 143.31 34,983
1,230.52 138.46 33,752
1,235.39 133.59 32,517
1,240.28 128.70 31,277
1,245.19 123.79 30,031
1,250.12 118.86 28,781
1,255.06 113.92 27,526
1,260.03 108.95 26,266
1,265.02 103.96 25,001
1,270.03 98.95 23,731
1,275.05 93.93 22,456
1,280.10 88.88 21,176
1,285.17 83.81 19,891
1,290.25 78.73 18,601
1,295.36 73.62 17,305
1,300.49 68.49 16,005
1,305.63 63.35 14,699
1,310.80 58.18 13,388
1,315.99 52.99 12,072
1,321.20 47.78 10,751
1,326.43 42.55 9,425
1,331.68 37.30 8,093
1,336.95 32.03 6,756
1,342.24 26.74 5,414
1,347.55 21.43 4,066
1,352.89 16.09 2,713
1,358.24 10.74 1,355
1,363.62 5.36 (8)
4. Why are mortgage markets studied as a separate capital market?

Mortgage markets are examined separately from bond and stock markets for several reasons. First, mortgages are
backed by a specific piece of real property. If the borrower defaults on a mortgage, the financial institution can take
ownership of the property. Only mortgage bonds are backed by a specific piece of property that allows the lender to
take claim in the event of a default. All other corporate bonds and stocks give the holder a general claim to a
borrower’s assets. Second, there is no set denomination for primary mortgages. Rather, the size of each mortgage
depends on the borrower’s needs. Bonds generally have a denomination of $1,000 or a multiple of $1,000 per bond
and shares of stock are generally issued in denominations of $1 per share. Third, primary mortgages generally involve
a single investor (e.g., a bank or mortgage company). Bond and stock issues, on the other hand, are generally held by
many (sometimes thousands of) investors. Finally, because primary mortgage borrowers are often individuals,
information on these borrowers is less extensive and unaudited. Bonds and stocks are issued by publicly traded
corporations which are subject to extensive rules and regulations regarding information availability and reliability.

5. What is a subprime mortgage? What instrumental role did these mortgages play in the recent financial crisis?

Subprime mortgages are mortgages to borrowers that do not qualify for prime mortgages because of weakened credit
histories including payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and
bankruptcies. Subprime borrowers may also display reduced repayment capacity as measured by credit scores, debt-
to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories. Subprime
mortgages have a higher rate of default than prime mortgage loans and are thus, riskier loans for the mortgage lender
and, as a result, these mortgages have higher interest rates than prime mortgages.

It was subprime mortgages and the huge growth in them that was a major instigator of the financial crisis. The low
interest rate environment in the early and mid-2000s led to a dramatic increase in the demand for residential
mortgages, especially among those who had previously excluded from participating in the market because of their
poor credit ratings, i.e., subprime borrowers. To boost their earnings, FIs began lowering their credit quality cut-off
points. In the subprime market, banks and other mortgage lenders often offered relatively low "teaser" rates on
adjustable rate mortgages (ARMs). Eventually, housing prices started to fall and interest rates started to rise. Since
many subprime mortgages had floating rates, meeting mortgage payments became impossible for many low income
households. The results were a wave of mortgage defaults in the subprime market and foreclosures that only
reinforced the downward trend in house prices. As this happened, the poor quality of the collaterals and credit quality
underlying subprime mortgage pools became apparent. Subprime mortgage-backed securities plummeted in value
and the financial crisis began.
 st, mortgages are
institution can take
allows the lender to
al claim to a
of each mortgage
of $1,000 per bond
ges generally involve
are generally held by
n individuals,
publicly traded
ity and reliability.

nt financial crisis?

se of weakened credit
ffs, judgments, and
y credit scores, debt-
es. Subprime
r the mortgage lender

cial crisis. The low

or residential
t because of their
edit quality cut-off
easer" rates on
arted to rise. Since
or many low income
res that only
rals and credit quality
ummeted in value