You want to buy a house and your bank is offering you four alternative type of loans. The loans differ between them on the length of time period that the interest rate remain constant. For example, the 1-year ARM (adjustable rate mortgage) will have its interest rate adjusted after one year. The table below shows the cost of the loan over a period of ten years, under the following hypothetical scenarios; rates in one year a) remain rise, b) remain constant, c) fall. Answer the following three questions and show the break-down of your calculations. Outcome Rates Stable $45,750 $49,564 Rates Rise $68,452 Decision Rates Fall 1-year ARM 3-year ARM 5-year ARM 30-year fixed $40,960 $64.547 $44,897 $50,124 $54.898 $57,325 $52,768 $54,898 $54,898 a) Which loan offers the best "average payoff" strategy? b) Which loan offers the best "aggressive" strategy? c) Using the "opportunity loss" strategy which loan we should choose?

You want to buy a house and your bank is offering you four alternative type of loans. The loans differ between them on the length of time period that the interest rate remain constant. For example, the 1-year ARM (adjustable rate mortgage) will have its interest rate adjusted after one year. The table below shows the cost of the loan over a period of ten years, under the following hypothetical scenarios; rates in one year a) remain rise, b) remain constant, c) fall. Answer the following three questions and show the break-down of your calculations. Outcome Rates Stable $45,750 $49,564 Rates Rise $68,452 Decision Rates Fall 1-year ARM 3-year ARM 5-year ARM 30-year fixed $40,960 $64.547 $44,897 $50,124 $54.898 $57,325 $52,768 $54,898 $54,898 a) Which loan offers the best "average payoff" strategy? b) Which loan offers the best "aggressive" strategy? c) Using the "opportunity loss" strategy which loan we should choose?

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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