Question 4: Application of Time Value of Money to Mortgages Shanna wants to buy a house costing $325,000 and has obtained a loan from TD Bank. A minimum down payment of 15% would be required and the bank will provide the difference. Her grandparent have told her that they will cover her down payment. a. TD Bank has quoted her mortgage interest rate is 4.5%; this rate would be compounded semi- annually, while her payments would be made monthly. What is the effective monthly interest rate (EMR) that she would pay? b. Calculate her monthly mortgage payment, assuming 15% down payment from her grandparents and a mortgage maturity of 25 years. c. Given (b) above, how much of her payment in the 2nd month will go toward repayment of principal and how much is interest payment? d. Assuming that five years later, interest rates drop to 3.2% and Shanna decides to refinance the mortgage. How much would she have paid in interest and how much of the original loan have you paid over the five years? e. Suppose she decides to refinance your mortgage to take advantage of the reduced interest rate. How would her monthly payments change if she could refinance her mortgage at 3.2% (with a 20-year term loan)? f. Suppose she kept her monthly payments at the original amount found in (b) above at 4.5%, but refinanced the at 3.2%, how long would it take her to pay off the mortgage?

A loan is a term that we are all familiar with. The processing of loans is one of the most important functions of a bank. It keeps our economy stable and facilitates the implementation of monetary policies. Let's take a look at the different forms of loa…