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required on a 30-year bank loan (requiring 360 monthly payments.) The loan amount is $300,000, and the ANNUAL interest rate is 3%. b) Compute the new market value of the above loan if, immediately after the loan is originated, interest rates (on similar loans) increase to 4%. (covered in class)

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Answer #1

Answer a.

Loan amount = $300,000
Annual interest rate = 3%
Monthly interest rate = 0.25%
Period = 360 months

Monthly payment * PVIFA(0.25%, 360) = $300,000
Monthly payment * (1 - (1/1.0025)^360) / 0.0025 = $300,000
Monthly payment * 237.18938 = $300,000
Monthly payment = $1,264.81

Answer b.

Annual interest rate = 4%
Monthly interest rate = 0.333%

Market Value of loan = $1,264.81 * PVIFA(0.333%, 360)
Market Value of loan = $1,264.81 * (1 - (1/1.00333)^360) / 0.00333
Market Value of loan = $1,264.81 * 209.56245
Market Value of loan = $265,056.68

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