Consider a bank that has made 100 mortgage loans of the following form: loan amo

Question

Consider a bank that has made 100 mortgage loans of the following form:

loan amount: $200,000

fixed mortgage rate: 5.4%

length/maturity: 30 years

payment frequency: monthly

An investor is contemplating the purchase of this pool of mortgage loans. For the investor, the annual rate of return on alternative investments is 4.2%. Assume that the mortgage pool does not have any default risk and that there are no fees to be paid in the transaction. Calculate the amount that the investor is willing to pay for the pool of mortgage loans. Using the receipts of this sale, how many new mortgage loans of the above form can the bank make? Support your answer with calculation.

Explanation / Answer

Loan amount is $200,000

Fixed mortgage rate is 5.4%

Length/ Maturity : 30 Years

Annual ROR is 4.2% on alternate investment.

Here the only thing we have to caluclate is the difference in interest rate that is offered

We have 4.2 ROR on other investments but bank is getting 5.4 a full 1.2% PA benefit to the bank.

The question here did not give any other data, So it is impossible to calculate how many more loans can be granted.

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