The Time Value of Money?

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Suppose a house is on the market for $ 250,000, and a bank agrees to lend the potential home buyer $ 220,000 secured by a mortgage on the house. Thus, the buyer must come up with $ 30,000 to complete the transaction. For purposes of this question, ignore any additional closing costs. Suppose the buyer has only $ 7,500 cash, and the seller agrees to take a note with the following terms: a face value of $ 22,500, a 7.5 percent annual interest rate, and payments at the end of the year based on a 20‐year amortization schedule, but with the loan maturing at the end of the 10th year.

(1)
What is the balloon portion of the payment due at the end of the 10th year?

(2)
What is the total payment that will due at the end of the 10th year?

I have no clue what to do and i cannot use a financial calculator. Can someone please help me? Thanks

1 Comment
  1. Reply
    JKRB
    April 29, 2011 at 11:15 pm

    First, calculate the payment using the formula:
    Payment = PVoa / [(1- (1 / ((1 + i)^n) )) / i]
    Where:
    PVoa = Present Value of an ordinary annuity (payments are made at the end of each period)
    i = interest per period
    n = number of periods

    The payment will be about $ 2,207.07

    (Since you can’t use a calculator, you will have to create an amortization schedule like this: Using the payment from above.

    Year—Balance——-Interest——–Principle
    1———22,500——-1,687.50——–519.57
    2———21,980.43—1,648.53——-558.54
    3———21,421.89—1,606.64——-600.43

    When you get to the 10th year, add the interest for that year, and that will be your total payment. Subtract the regular payment from that and the remainder will be the balloon payment.

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