Question

NCP bank extends a $400,000, 20 year mortgage at 5%. The interest rate increases to 6% soon after origination. Suppose the loan is expected to be prepaid in 9 years. What is the loss (interest rate risk) to the bamk from the mortgage? (use financial calculator)

Answer 1

Step 1: Calculate the interest received as follows: Interest - Principal amount Rate Period = $400,000x5% (20-9) = $220.000 Step 2: Calculate the actual interest to be received as follows: Interest = Principal amount x Ratex Period = $400,000x6%x(20-9) = $264,000 Step 3: Calculate the interest loss amount per year as follows: Interest loss per year = ($400,000 x 6%)-($400,000 x 5%) = $24,000 - $20,000 = $4.000 Step 4: Calculate the total interest loss for remaining period as follows: Actual interest to be received-1. Interest loss per year x Total interest loss = Interest received Jl Remaining period = [S264.000-$220.000]+($4.000 x9] = $44,000+ $36,000 = 580.000