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An investor is looking into purchasing the following mortgage from a local mortgage originator. This is...

An investor is looking into purchasing the following mortgage from a local mortgage originator. This is a $210,000 CPM mortgage that was originated 5 years ago at 10% for 30 years with monthly payments.

a. How much should the investor pay for this mortgage if her required rate of return is 11% and the mortgage is not expected to prepay?

b. What’s the market value of the mortgage if the borrower is expected to prepay the loan in 5 years (assume same discount rate)?

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10% Mortgage value-210000 Reqd rate of return 11% (TAKING YEARLY PAYMENTS) ?YI Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 21000 a) Amt to be paid for mortgage($29,858.88)NPV(K3,G4:G29) 21000 21000 Market value if loan paid in 5 y $189,888.41ENPV(K3,G5:G9,210000) 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000 Y10 Y11 Y12 Y13 Y14 Y15 Y16 Y17 Y18 Y19 Y20 Y21 Y22 Y23 Y24 21000 21000 Y25 21000

Ans a) For calculating as to how much investor should pay for the mortgage, we shall use the excel formula of NPV

ie NPV(11%,I4:I29) = -29,858.88, so investor should pay : 210000-29858 = $180,141

b) Market value of mortgage: NPV(11%,I5:I9) = $189,888

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