PART III You operate a local mortgage & loan business with two other partners. Your role is to adjust
the prime interest rate for variable & fixed mortgages for your customers, as well as deal
with the length of a mortgage.
1. A client comes in looking to apply for a mortgage, but does not have any prior knowledge.
Answer the following questions to help them decide which type of mortgage to get.
(a) At most banking institutions, there are two types of mortgages available: fixed
mortgages and variable mortgages. Describe the difference between the two main
types of mortgages. Give one positive and one negative aspect of each type of
mortgage
(b) Banks will often advertise interest rates using the terminology prime plus/minus
percent. For example, if prime is 1.5%, then 2.5% might be advertised as prime plus
1%. Express 1.45% and 4.35% using the terminology of prime plus/minus percent
using Canada's current prime interest rate.
2. How many years will it take for your client to pay off a mortgage of $250,000 if he makes
month-end payments of $1,500? Assume a fixed interest rate of prime minus 0.5% over
the term of the whole mortgage. You may answer either by hand, or using the calculators
TVM buttons. If you use the calculator, ensure you write down all of your inputs for
full marks. No time diagram is necessary.
3. Your client borrows $250,000 and agrees to pay $1,500 at the end of every month for
a 5-year term. At the end of years, there is $200,000 remaining on the mortgage.
Use the calculator's TVM buttons to determine the fixed interest rate on this mortgage
(you will be unable to do this any other way). Write down all of your inputs, paying
careful attention to negative signs, for full marks. Express your final answer using prime
plus/minus terminology. No time diagram is necessary