Assume You Bought a $400,000 House, Using an 80% Interest-Only

question 43

Multiple Choice

Assume you bought a $400,000 house, using an 80% interest-only mortgage. Transaction costs associated with the purchase amounted to $4,000. You estimate a net benefit of $2,000 per
Month from owning the home (e.g., the enjoyment of home ownership and the tax deductibility
Of the interest expense less the cash outflows associated with the mortgage payments, property
Taxes, etc.) At the end of a year, you receive a job transfer and are forced to sell your home.
Unfortunately, your employer doesn't provide any aid in this matter, and market values have
Declined. The real estate commission is 6% and other transaction costs associated with the sale
Amounted to about 1% of the selling price of $375,000. Assume the appropriate cost of capital
To use is 8% a year. What is your NPV on your investment?

• A)-$36,360
• B)-$120,178
• C)+$261,909
• D)-$108,462

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Definitions:

Interest Rate Volatility

The degree of variation of interest rates over time, impacting the valuation of financial instruments and the ability to forecast future rates.

Balance Sheets

Financial statements that summarize a company's financial position, including assets, liabilities, and shareholders' equity at a specific point in time.

Swaps

Financial agreements to exchange or "swap" cash flows or other financial instruments between two parties, typically involving interest rates, currencies, or commodities.

Index Futures

Financial contracts to buy or sell a financial index at a predetermined future date and price.