The Interest Rate for the First Five Years of a $120,000

question 179

Short Answer

The interest rate for the first five years of a $120,000 mortgage is 7% compounded semi-annually. Monthly payments are based on a 25-year amortization. If a $5,000 prepayment is made at the end of the second year,
a) How much will the amortization period be shortened?
b) What will be the principal balance at the end of the five-year term?

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Definitions:

Moral-Hazard

A situation where one party is more likely to take risks because the consequences of those risks will be felt by another party.

Principal-Agent Problem

A dilemma arising from a conflict of interest between a principal (someone who entrusts a task) and an agent (the one performing the task), where the agent may not act in the best interest of the principal.

Behavioral Asymmetry

A situation in economic or psychological contexts where individuals or entities exhibit uneven or unequal behavioral responses under similar circumstances.

Economics

The study of how society manages its scarce resources.