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!

bingbingliang

oh

Those scientists better check their hypotenuses, dude!

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.

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?