CFAI MOCK am test strong family monthly, interest, mortgage, remember

mkytz15

yo, i am looknig at band of interest problem 28. since when do we use annuities for mortgage rates? i know that BOI is like a WACC but i never remember seeing monthly compounding for a loan. am i wrong? am i losing it?


Those scientists better check their hypotenuses, dude!

economicz

BOI method is like wacc (except Cost of debt has no interest shield). also, you need to add a sinking fund factor to the cost of debt before you multiply by the weight. That is found using your NPV function in you calc with monthly compounding.

RepoToronto

i understood you all the way up to your last sentence" That is found using your NPV function in you calc with monthly compounding."i am using the NPV but i keep coming up with 9%.


oh wait looking at it again, i guess you set n= 300, i =rate/12 months, pv= $1 (this is where i got messed up, FV=0 and solve for PMT and multiply times 12 months? is that the sinking fund?

19831985

Close. N = 300, iy= rate/12, PV = 0, FV = -1, solve for PMT. This will give you a rate. Multiply by 12 to get the annual value. Then add that to mortgage cost. So if the mortgage rate is 7% and the value from the calculator multipled by 12 = .03, the total cost of debt is 7% + 3% = 10%.

That should do it.

Sportsman

I think that the question is just asking you to find the compound annual yield given the mortgage rate. So you de-annualize then compound to get the actual yearly cost of the mortgage.

bingbingliang

oh

Those scientists better check their hypotenuses, dude!