1. Mortgages - Department of Mathematics（1。）.pdfVIP

1. Mortgages Mortage loans are commonly quoted with a nominal rate compounded semi-annually; but the payments are monthly. To find the monthly payments in this case one finds the effective monthly rate of interest. Let r be the nominal rate compounded semi-annually; let i be the effective monthly rate of interest. To find i in terms of r we equate the effective annual rate of compounding semi-annually with the effective annual rate of compounding monthly. Hence (1 + i)12 − 1 = 1 + r 2 − 1 2 ⇒ (1 + i)12 = 1 + r 2 2 1 ⇒ 1 + i = 1 + r 6 2 1 ⇒ i = 1 + r 6 − 1. 2 Example 1. What is the effective monthly rate for a mortgage if the nominal rate is 12% compounded semi-annually? Solution. Take r = 12 , so 1 i = (1.06) 6 − 1 = 0. . . Note that the effective monthly rate of 0.98% is less than 1%, which is simply the nominal rate divided by twelve. Example 2. Find the monthly payments for a 25-year, $50,000 mortgage at 12% compounded (a) semi-annually, (b) monthly. Solution. The monthly payment for a mortgage is given by A